VC Perspectives From A Former Entrepreneur - Jeff Bussgang

February 09, 2015

Conventional wisdom suggests that the most important metrics for a startup - such as unit economics, cost of acquisition, lifetime value, churn rates - typically get better with time. I hear this asserted frequently by entrepreneurs who confidently project their businesses with increasingly improving metrics as they scale into the future.

The topic of scaling startups is one that I enjoy thinking, living and writing about (most recently, Scaling the Chasm). In the class I teach at Harvard Business School, the first module of the course is dedicated to examining startups when they are pre-product market and struggling to find product-market fit while the second module is dedicated to what the challenges of scale post product-market fit.

One of the themes I explore in the class is the tough reality that many metrics can actually get worse over time for a startup. Take growth rate as a simple one. The law of large numbers suggests it is easier to double in size when you are doing $1 million in revenue as compared to when you are doing $10 million, never mind $100 million. Thus, more mature companies naturally have slower growth rates than younger ones. Here are a few other key metrics that are hard to scale:

Customer acquisition. Most of the marketing techniques that look good in the early days cannot be scaled 10x, never mind 100x. For example, PR doesn’t scale. It seems like such an amazingly efficient source of customers, yet ask any marketing communications or PR professional to acquire 10x the number of customers that they did last year and they’ll look at you as if you have 10 heads. Search engine marketing (SEM) and app store optimization (ASO) exploit arbitrage opportunities in keywords and placement, but those arbitrage opportunities are effective only for a moment in time and for a certain level of spend. When you spend more, you risk losing that edge. Similarly, if you try to scale email too much, you quickly risk fatiguing your list and spending money acquiring less valuable customers when compared to your core segment.

Customer acquisition is like drilling for oil. A particularly successful tactic allows you to find a gusher, which you can take advantage of for a while, but eventually the well dries out and you have to find another well. One of my CEOs pointed out to me at a board meeting last week:

“Our average customer acquisition cost (CAC) is irrelevant for the future. It is the marginal CAC that matters the most – that is, what does it cost to acquire the next incremental set of customers?”

Word of mouth, referrals, virality – these are all amazingly powerful customer acquisition techniques that hold the promise of scale, but they require you to have a great product, not just a great marketing plan, and a product that is elegantly design for virality.

Churn rates are another metric that can get harder with scale. When you expand your market, the next market segment may not be as perfect a “bullseye” market fit as the early segments and early customers. Even as the product matures, the customers that are recently acquired that represent newer segments can be less dedicated. A new battle for product-market fit must be waged – something that never ends - particularly as you expand into new customer segments and verticals.

Monetization can get harder with scale as well. Monetizing the initial user base – who is your most dedicated and often organically acquired – is easier than the more marginal users who you are spending incrementally more money to acquire from indirect channels that may not produce as loyal customers as the initial channels. Even a company as amazing and well run as TripAdvisor (who I once claimed had a better business model than anyone outside the mob) has seen average revenue per user (ARPU) decline over the years, from $14.10 in 2009 to $11.80 in 2012. During that period of time, their monthly uniques grew over 2.5x, from 25m to 65m. More recently, with the shift to mobile and the growth in emerging markets, this ARPU decline has become even more dramatic as mobile visitors and international visitors monetize at a lower rate than their earlier segments of online, US visitors.

The trick to keeping your metrics steady during growth, if not improving over time, is to find a series of techniques and keep improving on them as you go. That’s why so many great entrepreneurs obsess over the details of landing page wording, button placement and color on a page, creative copy, etc. They know that being able to scale 10x from where they are has no silver bullet, but rather a series of tactics that need to be executed against. And they recognize that often times, as you are scaling 10x and 100x, your metrics may erode on the margin.

If your core metrics only erode 10-20% while you are scaling fast, like TripAdvisor’s ARPU, you are in pretty good shape. If they erode 50-75%, you are in deep trouble. Just remember, don’t project to investors that every metric is going to get better over time. Otherwise, you will be dismissed as naïve, out of touch, overly optimistic, insane or all of the above. Never a good combination.

January 13, 2015

One of my favorite business books of all time is Crossing the Chasm by Geoffrey Moore. It is a classic. My boss and mentor from Open Market, Gary Eichhorn, made the entire management team read it in the 1990s to hammer home its important lessons as we stumbled through the chasm on our way to scaling from zero to nearly $100 million in revenue in a few years.

I have been thinking about the challenges of crossing the chasm - that is, taking a cutting-edge product and selling it successfully to the mainstream, not just early adopters who are more tolerant of less complete solutions - and the challenges of scaling in general as many of my portfolio companies are dealing with these issues. A few years ago, I wrote a few case studies on how some big players achieved scale - like Akamai, TripAdvisor and athenahealth - to help crystalize my thinking on the topic, but I thought it might be appropriate to write a more general blog post on the challenges that companies face at different points in the scaling process.

Dealing with scale up challenges is particularly important to me because of our firm's investment strategy. We pride ourselves on being lifecycle investors, which means we invest very early on (typically at the seed or Series A stage) and then stick with a company through exit. Some VCs prefer investing at the earliest stages and then cycle off the board of directors. Others prefer to come in at the later stages, post product-market fit, and not have to deal with the risk and roller coaster of the early stages. Gluttons for punishment, we prefer to start early, take the risk and stick around through the end. As a result, I get to work with companies both during the search for product market fit and after they hit product market fit, and race headlong into the chasm.

For quick context, I sit on the board of eleven Flybridge portfolio companies and am an observer on two. Each of us typically makes one or two new investments per year (I made one new investment in 2014). With that rhythm, if things are going according to plan, I should have a spread of companies across a wide range of scaling stages, as measured by annual revenue.

If I plot my portfolio companies across a few broad revenue buckets, looking at 2014 figures, below is a chart. They spread fairly evenly, although slightly more in the earlier stages as few companies achieve the kind of success that $> 50m in revenue entails.

At each stage, there are different problems. Here are the patterns of issues I typically see at each stage - maybe you will recognize a few of them in your own companies:

$0-1 million

People: founder-run and trying to recruit amazing technical talent (the product development team is a huge priority at this stage) and integrate a few senior managers to help prepare the company for scale - which leads to cultural clashes and communication challenges. Also, the founders' roles' start to evolve (see: "The Other Founder") as functional areas and responsibilities become more precisely defined.

Product: the product is buggy and incomplete - really more of a feature than a complete product - but it is past MVP. Customers are using it and deriving value and now the challenge is how to complete it - fast, before running out of money.

Business Model: running a lot of experiments - pricing, packaging, value proposition. Always testing and trying to run fast tests to put up some strong metrics before running out of money (did I mention we're running out of money?).

Financing: holy crap - we are running out of money in 6 months! Have we acheived enough value-creating milestones to raise an up round? who will lead it (insiders vs. outsiders) and on what terms?

$1-10 million

People: things are going well - everyone gets excited when the cash register rings after a few big sales. The first version of the go to market team is hired (i.e., first sales person, first marketing professional). The founders are getting restless because they have been diluted, have less responsibility and realize that the company isn't going to reach $1 billion in 3 years. Also, that first VP you hired was great from 0-1 and good from 1-10, but you're afraid she can't scale to the next level.

Product: the product is better - A LOT better - but now we have technical debt thanks to our success. Anyone up for a rewrite? How much do we invest in a rearchitecture versus adding new features.

Business Model: Time to get some channel and business partners on board, because adding revenue by adding sales and marketing dollars is going to be expensive - no matter what the early LTV vs. CAC data shows. The focus now is building a repeatable, scalable sales machine.

Financing: The "hopes and dreams" financing stage is over. Nothing ruins a good story like numbers and now we have numbers so we better have them look good enough to support a strong expansion round. And why does it look so easy to raise $20m on $100m pre for companies at an earlier stage than I am every time I read TechCrunch, as my board reminds me every month (and can I stop having monthly board meetings already)? Do we take a little venture debt to get us to give us some cushion as we progress to the next valuation inflection point.

$10-50 million

People: The functional management team is running out of steam - do we need to roll up a few things and perhaps hire a COO? The board has too many investors on it (how did that happen?!) - can we add an outside director of two? Most critically, is the CEO scaling or is time to replace them as well (ideally not).

Product: Now that we have a robust product and paid down our technical debt, we seem to have lost our ability to run experiments - how do we maintain that mission-critical quality for all these customers while remaining as nimble as we were when we were a startup? Also, customers are pushing us to provide a solution, not just a product, and so suddenly we need services and partners to round out our offering.

Business Model: Now that we are at a reasonable scale, why are our gross margins so low and what can we do to fix it? Is it time to be profitable or should we continue to prioritize growth and invest ahead of revenue? Should we pursue adjacent M&A or tuck in acquisitions to expand our market footprint?

Financing: Is our market big enough to support another round (which puts the exit bar even higher)? Is it time to consider an exit? Would an IPO be possible in the future if we can continue growing 50-100% per year?

$50-100 million

People: Should we have a business unit structure or retain the functional structure? Do we have an IPO management team in place? Is the CEO still a single point of failure or can she delegate effectively in the event of a road show? Board committees start to really matter.

Product: With a robust product and complimentary solution in place, let's open this sucker up - let's build as many APIs as we can and evolve this thing into a platform. Time to enlist some 3rd party developers!

Business Model: If we're not profitable at this point, we better be growing > 50%/year. How profitable should we be? Are we seeing erosion in our LTV vs. CAC math or is it continuing to scale nicely? Where should our first international office be and how much should we invest?

Financing: Do we have the metrics to support a growth or mezzanine round? Let's expand our debt capacity and put in place a working capital line and receivables facility.

>$100 million

People: The A team is in place at the top and now we have to focus on solidifying the next level and providing them with great training, career paths, growth and additional stock options (in the form of refresh grants) as they are all getting approached by pesky recruiters.

Product: We are in the midst of a feature war with competitors - how much do we invest in new product innovation versus continue to harden and prepare for scale. How can the product be changed to lower the cost of delivery for us and cost of ownership for our customers?

Business Model: Services revenue and services partners become more important. Investing more heavily in international.

Financing: Why haven't you filed the S-1 already?!

One of the things I've learned from my two decades in startup land is that it doesn't get any easier as you scale - the problems just evolve, but there are still problems. And opportunities. But I guess that is what makes the startup game so fun.

December 30, 2014

December 01, 2014

One of my favorite childhood books was SE Hinton's The Outsiders. For whatever reason, I always related to this tough group of teenagers who felt like societal outcasts just because they were born on the wrong side of town.

I was reminded of the book the other day when attending the Unconference. The Unconference is a Boston-based technology conference put on by the MassTLC that has no agenda. Instead, the agenda is created dynamically the day of the conference by the attendees. Sessions are created on the fly, led by whoever wants to lead a session.

At many conferences, there is a sense of "insiders" and "outsiders". Insiders have attended the conference in past years, speak on panels, walk around with great confidence and poise because they "know everyone" and are sought after during the course of the conference. They are the popular kids at the conference. Outsiders come to the conference knowing no one else, are often lingering awkwardly on the periphery during networking time and struggle to gracefully secure air time with the very people they came to the conference to meet.

The Uncoference tries to break this paradigm with a more dynamic sesssion format alongside structured one on one sessions between well-known insiders with eager outsiders. I try to sign up for these one on ones every year, which are essentially an extension of the offce hours concept that many VCs (including Flybridge) have been championing as a way to provide more accessibility and transparency between insiders and outsiders. A few years ago, I was matched with a very tall, eager entrepreneur who shared with me his passion for private coaches for sports. His name was Jordan Fliegel and, although his 6 foot 7 inches frame stood out amongst the crowd of nerds and middle aged investors, he was an anonymous outsider that day.

Since then, Jordan's company, CoachUp, has secured venture capital funding from a local big name firm (General Catalyst) and grown into a local success story. In a few short years, Jordan has become the definition of an insider - he's now one of the best known figures at any conference and has even started an angel fund, Bridge Boys, with one of his childhood friends.

A few years ago, I met a student during office hours at HBS, who was embarking on a new company. He was new to Boston, having grown up in Iowa, attended Brown and then worked in Chicago. I was with him at a lunch at a conference and, sensing his discomfort as an outsider, started to introduce him around - endorsing him with the insiders around me, like reporter Scott Kirsner and serial entrepreneur Walt Doyle. Before long, Brent Grinna (CEO/founder of EverTrue), blossomed into one of the local innovation community's strongest leaders and insiders, sought after as a mentor by others for his success with the company (backed by big time, insider firm Bain Capital) and within the community. Brent reminded me of this story with this recent tweet.

Francis Ford Coppola turned SE Hinton's book into a move, released in 1983. The movie starred a slew of young Hollywood outsiders - a remarkable number of whom became the ultimate Hollywood insiders, including Tom Cruise, Rob Lowe, Patrick Swayze, Emilio Estevez and Ralph Macchio. That's the magic of a dyanmic, entrepreneurial environment - today's outsiders can become tomorrow's insiders. That's why immigrants, students and other outsiders are such valuable members of the entrepreneurial ecosystem - and why we should be doing everything we can to encourage and support them.

November 03, 2014

Becoming an entrepreneur is illogical. If you were to calculate the expected value (i.e., the probability-weighted average of all possible outcomes) of being an entrepreneur as compared to living the safe life of a traditional executive, it wouldn't even be close. On a purely rational, probablistic basis, the math for entrepreneurship doesn't add up.

Despite this, entrepreneurship is on the rise. For those of us who live in that world, we know that entrepreneurship is about passion more than rational thinking. It inspires those who are crazy enough to believe that they can change beat the odds and succeed in changing the world, or at least their little corner of it.

That's why I love Linda Rottenberg's new book, Crazy is a Compliment. First, I should admit a bias. I deeply admire Linda and her non-profit organization dedicated to global entrepreneurship, Endeavor. We first met in college when we volunteered together in an inner-city high school in Roxbury. Although I don't get to see her as often as I would like, I've had such respect for Endeavor that I decided to donate the proceeds from my book to it. Thus, I was positively inclined when I cracked open the binder.

But I still loved it. It gives entrepreneurs a roadmap, plenty of fun war stories and (in typical Linda fashion) a very human angle. For example, perhaps the most powerful part of the book is when she shares how her husband's bone cancer diagnosis forced her to be more vulnerable at work and let go of her perfectionist zeal. She even dedicates a section of the book - "Go Home" - to addressing the importance of trying to "Go Big AND Go Home", i.e., pursue an ambitious career with passion AND at the same time live a balanced life (charmingly, she writes this section directly to her daughters - as if the reader is a bystander in the dialog).

Here were a few of my other favorite sections/lessons:

Esta chica esta loca. As an entrepreneur, there are many times when you need to do crazy things. In fact, if you're not doing a few things that conventional wisdow would refer to as crazy, you're not thinking big enough.

Fire your mother-in-law. Sometimes, when you are growing and evolving the business, you have the courage to kill "sacred cows" (pun intended - but not all related to my mother-in-law, who is lovely)...

Flawsome. Effective leaders are very human - flawed AND awesome at the same time.

Upside down mentoring. I've written about Reverse Mentors and Linda's concept is similar - senior people should seek out junior ones to learn from them, not just mentor them.

The book is chock-full of funny, engaging stories and case studies as well - some familiar, but most unfamiliar and not your typical entrepreneur yarns (e.g., I never knew the story behind Maidenform Brands).

October 06, 2014

Last week's successful IPO of e-commerce giant Wayfair (market cap $3B) and this week's impending IPO of Hubspot (if it prices in the range, market cap $600m) has many in the Boston tech community celebrating. They are not alone. 2013 was the best year for IPOs since the tech bubble of the 90s and 2014 looks to wrap up even stronger this quarter.

I was an executive at a hot IPO company during the last big tech boom (NASDAQ: OMKT) and, like many who lived through that cycle, I gleaned a few important lessons. After the IPO party is over (and we had a great IPO party) and the euphoria wears off, you actually have to run a company and live up to the big expectations that you have just publicly set. Your venture capital investors and many early employees head for the door and you are left holding the bag. Here are a few things I learned after my 16 quarters as an executive post-IPO:

1) The Mission Continues. On average, it takes 8-10 years for a start-up to go public. After a lot of ups and downs, twists and turns, it feels like a massive victory (aka "Mission Accomplished", as George Bush famously declared regarding Iraq in 2003). By that time, your team will be exhausted. Naturally, a huge let-down ensues, particularly after the first hiccup - and there will always be a hiccup: a missed quarter, a departing executive or major customer, something. Recruiters and venture capitalists salivate over picking off executives at recently public companies with the siren song of "don't you want to do that again?". If the stock price flags, all the better. Executive teams need to focus their staff post-IPO on a new mission. Be clear that the end goal was never an IPO - that is merely a financing event, a means to an end. The end goal is industry transformation, customer satisfaction, etc. Find that new mission - and make sure you get your team behind it. Give them more stock options, more incentives and more inspiration to go at it hard for another 8-10 years.

2) Don't Let The Turkeys Get You Down. When Ronald Reagan left office, he provided a final note with words of wisdom for incoming president Geroge HW Bush: "Don't let the turkeys get you down." And, believe me, when you're a newly public company executive, there are a lot of turkeys out there. Not only is there a risk that your company mood ebbs and flows with the daily stock price (your stock is down 10% thanks to Vladimir Putin - deal with it), but you are suddenly publicly castigated for every move. Investing an extra $1m in R&D in order to accelerate your game-changing new product? Pre-IPO, your board would have applauded. Post-IPO, you will get hammered. And if any insiders dare to divest of their shares, even in programmed trading batches, it will kill you. I remember delivering a (compelling, I thought) company presentation at a Goldman Sachs conference and, afterwards, the first question was, "Mr Bussgang. If your company is so great and the future so bright, why is your CEO selling stock?" Many Wall Street analysts are total turkeys. They build their reputation by tearing yours down. Be tenacious and true to your strategy and prepare your team to ignore the noise. Gail Goodman is one of the most tenacious, skilled public company CEOs I know. Many analysts hammered Constant Contact shortly after the IPO, complaining about churn rates and missing the social marketing window. The stock waxed and waned and Gail just kept executing. A few years later, the stock has nearly tripled these last two years and the market cap is near $1 billion. Watch her public presentations over the years and you'll see Gail kept telling the same story - making small improvements every quarter and showing the turkeys the value of the business. Care.com CEO Sheila Marcelo is in the midst of a similar situation. Her stock is down 3x from its post-IPO high with a market cap of a paltry $250 million. I'm rooting for her to prove the turkeys wrong, just like Gail did, but it requires a tremendous amount of patience and tenacity.

3) Wall Street Is Annoying...But Sometimes Right. OK, I know this sounds like a contradiction to point 2, but it's the unfortunate truth. Wall Street analysts and hedge fund managers can be annoying, short-term minded turkeys, but they're smart and often right. Carl Ichan's recent battle with eBay/PayPal is a great example. The trick is to ignore the noise, but don't walk around with an arrogant attitude that you are always right and the critics are always wrong because they just "don't get it." Make sure you listen carefully to the smart Wall Street analysts and incorporate their feedback where appropriate. Make sure you have board members who make you a little uncomfortable because they hold you accountable. The cozy days of the VC-led board where everyone is trying to blow smoke and get you to help them with their next fund is over. Wall Street doesn't care about a long-term relationship. They demand results. And sometimes their cool, analytical distance can be very valuable. It can be painful and distracting, but sometimes very enlightening and helpful.

Ben Horowitz's book, the Hard Thing About Hard Things, is one of my favorite business books of the year. The best parts, in my opinion, describe Ben's struggles as a public company CEO trying to refocus and motivate his team, make hard pivots and hard decisions, while dealing with internal and external challenges. His case study is precious, because in my experience it plays out again and again and Ben's candor and authenticity allow us to peer into the raw emotions and feelings of riding through those ups and downs. Executives of these newly public companies should take heed. Linger on the champagne for a moment, but then quickly clean up and get everyone focused on what's next.

September 18, 2014

Every September, I give a presentation at Harvard's i-Lab to provide a guide to the Boston start-up scene. Students from around the world descend on Boston every fall to attend the amazing universities, but often fail to venture outside the ivory tower and explore the local start-up scene. This guide is an attempt to inspire students to do just that. This year, I added a number of updates and resources. Enjoy!

September 02, 2014

According to Webster’s Dictionary, the word “programmatic” was first used in the late 19th century. Despite its long tenure in our lexicon, the word was an obscure one until recently. If you aren’t familiar with it yet, if it hasn’t permeated your corner of the business universe, just wait. Programmatic thinking might soon join the pantheon of 21st century buzz words, alongside big data and cloud.

The current industry being transformed by programmatic thinking is the advertising industry. A few years ago, software entrepreneurs began to realize that as advertising started to go digital, there was an opportunity to apply algorithms to media buying decisions. Instead of having a 27 year old neophyte designing your media plan over a three martini lunch, have the world’s most powerful machines do it for you “auto-magically”, leveraging all your best data – and streams of other’s best data – to inform the decisions. And the best part? The machines learn how to make better and better decisions with every purchase.

The speed with which programmatic advertising has taken over the industry has been breath-taking. From nowhere a few years ago, $12 billion of advertising was purchased programmatically in 2013 and the forecast for 2017 is $33 billion (Magna Global report). 86% of advertising executives and 76% of brand marketers are using programmatic techniques to buy ads and 90% of them indicate they intend to increase their usage by half in the next 6 months (AOL survey). Companies like AppNexus, DataXu (a Flybridge portfolio company), MediaMath, RocketFuel and Turn are among the leaders in the field.

The next industry to be transformed by programmatic thinking is financial services. Decisions to underwrite loans have historically been based on a few simple data points such as the lender’s zip code, credit score and job history. With the application of big data techniques and sophisticated machine learning algorithms, underwriting decisions are becoming programmatic. For example, Flybridge portfolio company ZestFinance evaluates thousands of data points in credit applications (even trivial ones, such as whether the applicant uses capitalization properly) to make loan underwriting decisions programmatically. Like other programmatic-based businesses, ZestFinance sees a powerful network effect: the more data they inhale and the more decisions they make, the smarter their decisioning algorithms become.

What other industries might see programmatic thinking ripple through? Once I put the programmatic lenses on, I can see dozens of industries being affected. Just think about all the decisions consumers and businesses make, and whether programmatic thinking could automate and enhance those decisions. For example:

Navigation decisions: my navigation behavior follows clear patterns, as does that of millions of others. Navigation software in cars and phones will soon become more programmatic in anticipating where I might be going and the best routes to get there based on real-time data and experience.

Hiring decisions: evaluate thousands of data points to evaluate the best candidates and then watch their performance and make better decisions next time.

Security decisions: evaluate thousands of possible threats and patterns, watch the outcomes, and design algorithms that learn from these experiences to reduce acts of fraud and terrorism.

Investment decisions: One of our portfolio companies, MatterMark, evaluates thousands of data points to determine private company performance, and then seeks to tune those algorithms for more and more accurate predictive investment decisions. Today, their service is being used by hundreds of investment firms.

Some might object that all this automation and machine learning designed to replace human judgment is going to be bad for society - making humans less relevant and eliminating jobs. But in fact, many researchers believe the advent of machine learning will generate new kinds of jobs - where a hybrid of automation and common sense is applied. MIT's David Autor presented a paper a few weeks ago that argued:

Many of the middle-skill jobs that persist in the future will combine routine technical tasks with the set of non-routine tasks in which workers hold comparative advantage — interpersonal interaction, flexibility, adaptability and problem-solving.”

So don't be afraid to put those programmtic glasses on. I think they're pretty rose-colored.

July 21, 2014

In 1998, Yom Kippur fell on September 30th. For most of the Jewish community, the date of the most important holiday of the year was no different than in other years. For me and my Jewish CEO boss, though, as officers of a public software company, September 30 was a tough day to be out of the office, sitting in synagogue atoning for a year full of sins. It was the last day of the third quarter of the year and we had more deals we needed to close to finish the quarter strong and report numbers to Wall Street that justified our high-flying profile as a recently public Internet commerce software company. By sundown September 29th, when we left the office for the onset of the holiday's traditions and presumably focused on higher order matters, we had not yet made the quarter. Going offline without knowing our fate resulted in one of the most miserable 24 hours in synagogue I can remember (and I am somone who usually enjoys being in synagogue!).

When my CEO and I got back online after sundown September 30th, it became evident that the final handful of deals that we needed to close to make the quarter had slipped out. A few weeks later, we "pre-announced" that we were going to miss the quarter - one of the worst speeches I ever remember being a part of. Our stock naturally plummeted.

We were victims of a lot of problems, many of our own doing, and I can hardly blame Yom Kippur and the holiday's inopportune timing on our missing the quarter. But many years later, I began to appreciate that one of our core flaws was our business model.

We priced our enterprise software in the form of a perpetual license. As a result, the full revenue for each deal was recognized in that quarter as soon as the software was shipped. This allowed our revenue to skyrocket from $1.8 million to $22.5 million in one year, the year we went public at a billion dollar valuation (ok, it was 1996; everyone went public in 1996 with a billion dollar valuation), and then $61 million the following year. But the downside to our business model was that we did not have hardly any recurring revenue.

I later came to realize that recurring revenue is magic.

Since my harrowing experience, I have become a zealot about recurring revenue. When I discuss business models with entrepreneurs and investors, there is a varying appreciation for why recurring revenue is so special. Recurring revenue business models are not a little bit better than non-recurring models. They are 10x better. At Flybridge, we have added "business model", with a particularly weighting towards recurring models with high gross margins, as one of the important evaluation criteria when we make investment decisions alongside market and team, which are the two canonical criteria for all venture capital firms.

Before explaining why they are so magical, let me define a few types of recurring revenue models. Many jump to the assumption that SaaS (software as a service) is the only recurring revenue model, but there are actually a few you can choose from when designing your business model:

Consumable - the classic recurring revenue business was invented by Gillette: get cheap razors in the hands of shaving consumers and then perpetually sell them expensive razor blades. Keurig has a similar beautiful model with its coffee machines - keep selling those consumable coffee containers and your business never loses its value. 3D printers, with their consumable resins, have a similar business model.

Subscription - this is when you have a subscription contract for a period of time, typically annualy, and charge yoru customers for the service or content pro ratably over the course of the period. Magazine subscriptions and software subscriptions (often often called SaaS) fall into this category. SalesForce.com basically invented this model for software companies. Your cell phone provider, Netflix and Hulu are other examples of successful subscription revenue model businesses.

Transaction - this is where you charge for transactions that occur over and over again. The credit card companies and other high-frequency payments-based businesses, such as PayPal or Stripe, are examples of this kind of recurring model. Uber is another nice example of this since securing transportation tends to be a recurring transaction for many professionals.

Rental - finally, when you borrow an asset, such as an apartment or a car, you are signing up for a recurring charge so long as you continue to borrow that asset. This creates a recurring model as well. Data storage companies have this model as do many cloud services, such as Amazon's AWS. Amazon is renting you their assets - powerful computers and endless data storage. Amazon also has software and analytics that you are subscribing and so have a doubly powerful recurring model.

Here's why recurring revenue is so magical:

Predictability. When you have a recurring revenue business model, you rarely miss your monthly or quarterly numbers by more than 10-20%. Your forecasting process is much more accurate. At the beginning of the quarter, you start with a base to grow from rather than begin at zero. In a SaaS or subscription software business, you can predict your churn rate and new business closings to determine your growth rate. The management team and the investors are thus rarely surprised by major fluctuations in your results. As discussed below, this predictability has many downstream benefits.

Visibility. Because of the nature of recurring revenue models, you have clear visibility into what is coming in the next few quarters. You know where you stand well in advance. In a recurring revenue model, if you take the last day of the quarter off, you will not tank the company because you have so much visibility into your business, you are rarely surprised about what happens on that last day. For example, by mid-year, two of our portfolio companies with transaction-based recurring revenue models, Bluetarp and Cartera, have already confidently predicted they are going to meet or exceed their plan for the year and are working on what they can do to impact 2015. If they are off, they will know it well in advance of any of our portfolio companies that are non-recurring in nature.

Expense management. Predictability and visibility means you can manage your expenses more precisely relative to your revenue. One of the hard things about lumpy revenue models is that until literally midnight on the last day of the quarter, you don't know how you did. Which means it is hard to ramp up or down expenses smoothly to match revenues. Ramping expenses up and down is a sticky process because it usually involves people and there are many friction points, delays and costs as well as externalities (such as morale) when you try to rapidly ramp down expenses in a quarter as a result of lower-than-anticipated revenue.

Valuation. Because of the predictability and visibility factors, valuation multiples are radically different for recurring revenue businesses than any other revenue model. Terry Kawaja did a wonderful analysis of advertising technology company valuations and the positive impact on multiples that exist for SaaS and programmatic companies (such as our portfolio companies tracx and DataXu, respectively) as compared to non-recurring advertising technology companies. When we analyze the public company comparables for our portfolio company, MongoDB, we are always amazed at how much higher those comparable companies (enterprise SaaS leaders, like Palo Alto Networks, Splunk and Workday) are trading as a multiple of revenue (often 8-12x) as compared to other public companies that are not blessed with such a magical business model. A recent investment banking analyst report I read showed that companies with SaaS software models averaged a 6x revenue multiple, twice as high as the 3x revenue multiple that perpetual software companies average.

To be clear, recurring revenue models are not perfect. It is harder to ramp to 10x year over year growth. You do get plenty of lumpiness in bookings of new business, which translates into higher or slower growth rates over time, depending on performance.

But despite these downsides, it is clear to me why there is such magic in recurring revenue models. It looks like Yom Kippur once again falls on the last day of the quarter in 2017. With the majority of my portfolio companies having recurring revenue business models, I am not going to sweat it.

June 12, 2014

My friend, Ed Zimmerman, wrote a terrific post for his WSJ blog - "Help Me Help You" - on soliciting him (and others like him) for investor introductions.

I wanted to add to Ed's post and observe that not all introductions are created equal. The source of the introduction matters a lot. As a result, when the introduction comes in to the investor, judgment is applied based on the source. Most investors apply a simple ranking algorithm against introductions which determines how they react to them in terms of prioritizing their time and the seriousness with which they approach the opportunity. Here’s how it works in my experience:

Entrepreneurs who have made them money. There’s no more powerful introduction to an investor than from an entrepreneur who has made them money. Investors will drop anything to take a meeting with or seriously consider evaluating an entrepreneur recommended by someone who previously made them money. No investor wants to hear feedback from a former moneymaking entrepreneur that they didn’t treat a friend of theirs respectfully. The CEO of one of our top-performing companies made an introduction to a former technical colleague of his and we jumped all over it. He personally invested (another huge positive signal in the ranking algorithm) and we ended up leading the company's seed and Series A.

Entrepreneurs in their personal portfolio. VC investors may have 8-12 actives investments at any time. Each of those portfolio companies may have 6-8 executives that are senior enough to have board visibility. These 50-100 executive represent the next rung in the ranking ladder. Active angels might have twice this number. Investors will take these introductions seriously, although may be more judicious depending on what they think of the executive making the introduction, how their company is performing and what their assessment is of the opportunity (all factors in the ranking algorithm).

Entrepreneurs they respect. Generally, accomplished entrepreneurs are like soothsayers - if they're a part of a successful company, then it is assumed that they have great insight into how to build other successful companies. Thus, if an entrepreneur I respect sends me something, I always take a close look.

Service providers they respect (lawyers, bankers, accountants, headhunters). Some service providers have very close relationships with investors and when an introduction is made, a rapid response and close look is taken. Other service providers claim to have close investor relationships, but in truth merely are "friendly" with some VCs who may not think much of their investment judgment and sourcing suggestions. Be careful with this category. It can be gold (e.g., one of our best deals came from an introduction from a banker whom we respect greatly) and others are disregarded (e.g., the random investment banker / broker semi-cold emails).

Existing investors. This is one of the trickier categories for introduction sources as there can be a wide disparity in how it is viewed. All existing investors promote their portfolio companies - that's part of their job. Many have reputations for being indiscriminate promoters. Others have reputations for being great at picking winners and thoughtful in who they expose their best companies to. Before you ask your existing investors to fire off introductions, think through who has the best relationship with whom and what their impression of that investor is. I've seen an existing investor who claimed to their entrepreneur to have a great relationship with a top-tier firm, but be dismissed out of hand as a small timer. VCs, in general, are wary of the "buddy pass" - when one of their "VC buddies" (who isn't really a close friend but rather a professional colleague) passes along their crappy portfolio company and tries to promote it aggressively.

Cold emails / LinkedIn messages. Seriously? This is the worst way to approach an investor. In today's transparent, super-connected era, if you can't find a way to get to an investor through one of the methods above, you have failed a basic test. This will result in a low ranking, for sure.

Other investors who are not investing. After turning down an opportunity, I sometimes hear back from an entrepreneur a request to make an introduction to another investor. Here's why that's a bad idea. Imagine the conversation...VC1 to VC2: "Can I intro you to this great entrepreneur raising money?"

VC2 to VC1: "Sure! Are you investing?"

VC1 to VC2: "No."

VC2 to VC1: "Oh. Well have you worked with the entrepreneur before in another setting?"

VC1 to VC2: "No."

VC2 to VC1: "Well if it's not good enough for you to invest and you've never worked with the entrepreneur, why should I bother spending time with them?"

I'm sure there are plenty of other permutations of the ranking algorithm, but you get the picture. Think carefully not only about how you approach the introduction (as Ed recommends) but who you approach to affect it.

May 20, 2014

It is graduation season at colleges and universities around the world. This time of year brings stirring commencement speeches from famous (and sometimes controversial) leaders and thoughtful reflections from students on the considerable time and money they spent in academia.

Two of our students at Harvard Business School wrote a beautiful blog post, with some great visual data, about what they did NOT learn at Harvard that I thought was worth sharing. The post was written by Ben Faw (a West Point and Ranger School Graduate who worked at Tesla and LinkedIn) and Momchil Filev (a Stanford graduate who worked at Google and was a student in my class at HBS).

While there are many things that we learned during our two years at Harvard Business School, here are a few that we did NOT learn.

The only way to make an impact is to go to Wall Street.

As you can see from the interactive chart below, more HBS MBA graduates are heading out to the West Coast, taking positions in product management, marketing, sales, and general management. In a dramatic shift versus a decade ago, technology jobs are just as sought as roles in finance. MBA’s are proving that they can make a difference as leaders in many different industries and fields. Classes, such as Launching Technology Ventures and Product Management 101, are encouraging this trend - preparing students for these jobs.

Money matters more than people.

Prior to attending business school, we were warned that HBS was filled with people willing to do anything to make inordinate amounts of money and that it is not the place to meet or build true friendships. Having kept an open mind, we will graduate from Harvard Business School in a few days with many authentic relationships that have already been incredibly rewarding and made us a better version of ourselves. These amazing bonds are priceless and define our experience here, helping us learn that people matter far more than money.

Experiences are expendable.

The MBA critic will say that most of what you learn in the class can be obtained more cheaply and more effectively by buying the books, studying on your own, and watching classes online. In reality, no case study, framework, or amazing guest speaker can match the experience of learning from your peers, both inside and outside of the classroom. You can learn material many ways, but the most meaningful learning opportunities require in-person experiences and shared time together. The full-time in-class HBS MBA experience provides both.

More is better.

HBS teaches us that we can’t have everything. From day one, we are inundated with endless mixers, social gatherings, and recruiting events. We are also exposed to hundreds of classmates who each have an incredible story to tell and would be incredible additions to our network. However, we can’t pretend to really get to know them all, just like we can’t prepare well for every single interview. We have to make tough decisions. We have to invest - fully and deeply - in the few people and things that make us the happiest. Only then can we make a truly meaningful impact as future business leaders.

Seeking out and receiving feedback is a waste.

No one is perfect, regardless of how impressive their resume. Everyone can improve if they put effort in and use their friends and peers in the process. After a semester of cases and guest lectures one theme became clear: success post business school depends less on your IQ and more on your ability to work with others. Can you motivate a team and accomplish a common task that is impossible to achieve alone? We would say no if you cannot accept and give the honest feedback that allows a team to function at an optimal level. As uncomfortable as it is to give and receive feedback, the MBA class contains people who have a vested interest in your success and want to see you “Be all that you can be”. Seeking out these people and letting them play a direct role in your development creates the potential for amazing growth.

Learning stops when class ends.

While the classroom was incredibly valuable to my development and education (both here and as an undergrad), we found our experience outside the classroom to be equally, if not more, valuable. Ranging from debates over equity investments, deep conversations on business models, or discussions around how to create a sustainable competitive advantage, outside the classroom learning never stopped. Our interactions with professors, peers, and mentors beyond the teaching halls contributed the most to our personal and professional growth.

Try everything.

Focus on your strategy, on your goals, and on what you are uniquely good at and love. The rest is noise. If you are terrible at modeling financials or hate using Excel, learn the basic competency, and then follow your passions. There will be something that makes your eyes sparkle and your face light up. Find out what that is - you have two years to do just that - and then run after it without looking back.

A special thanks to Harvard Business School for making entrepreneurship and technology a key focus for the school in the last few years. Classes such as Launching Technology Ventures and the incredible resources of the Rock Center for Entrepreneurship and the Harvard Innovation Lab have made the MBA experience incredibly fulfilling, and we are incredibly grateful for having the opportunity to take advantage of them during our time here.

To Ajmal Sheikh, Heidi Kim, Julia Yoo and Walter Haas: You have each been wonderful co-authors and co-editors in this writing process and more importantly dear friends, thanks for making an idea become reality. To the Professors, staff, and faculty of Harvard Business School, thanks for making this an experience unlike any other – one chapter ends, the pages turn, and another begins!

May 14, 2014

The trade association for the venture capital industry, the NVCA, gathered yesterday in San Francisco to talk about the state of the industry and some of the key policy issues we are facing. The short list is an obvious one for anyone who has been reading the news lately: Net Neutrality, Immigration Reform and Patent Reform are all hot topics in our industry. More inward-looking topics like the rise of corporate VC and new emerging managers also were batted about.

But one panel stood out for me yesterday, and not just because I was on it: "Women in VC". Maria Cirino of 406 Ventures led a discussion regarding the stubborn reality of the massive, pernicious gender gap that exists in our industry. Because the numbers are so stunningly bad - Dan Primack did some analysis a few months ago that showed that only 4% of all senior VC partners are women and NVCA statistics show that 11% of all VC professionals are women - I wanted to spend some time sharing the observations and discussions that came out of the panel in the hopes that it will spur further discussion in the community.

The panel was an awesome group led by Maria and included Kate Mitchell of Scale Ventures, Diana Frazier of FLAG, author Vivek Wadhwa and Veracode CEO Bob Brennan. I don't know exactly why I was on the panel, to be honest, but it probably had something to do with a blog post I wrote four years ago titled "The VC Gender Gap: Are VCs Sexist"? It may also be that at Flybridge, after founding the firm with all men, we have hired a majority of women (5 out of 9 investment professional team members). That said, the four general partners are still men - more on that shortly.

Wadhwa kicked things off with a recitation of some research in the area. Specifically:

In an HBS research study, it was shown that - all else being equal - investors prefer backing men over women (and good-looking men over less good-looking men): a male founder is 60% liklier to secure financing from investors.

A data point I didn't get a chance to mention during the panel is that only 9% of all HBS case study protagonists are women - something the dean has identified as an issue and has stated a public goal of getting to 20% (I have consciously tried to address this in my entrepreneurship class, where 40% of the protagonists are women and more than half of the panelists I bring in).

With the data on the table, the real discussion began. Everyone agreed there is a pervasive bias in the industry. Not everyone agreed what to do about it. A few observations were interesting to me:

Paul Maeder at Highland shared his conclusion that the industry is culturally dysfunctional. There is no good logical reason for the numbers to be as bad as they are. He drew an analogy with gay marriage, where there after decades of discrimination, we recently hit a tipping point where suddenly it was no longer culturally appropriate to block gay marriage. What needs to occur to hit that tipping point regarding women in venture capital?

Someone pointed out that corporate VC is less gender biased, perhaps because corporate America has rules that they live by. Although there is still plenty of sexism in corporate America, there are systems and processes in place to support diversity, recruiting and mentoring. Small VC partnerships do not live by similar rules. One woman corporate VC in the room who had previously been at an institutional VC observed that she preferred the partnership dynamic in corporate VCs where the investment committee is not made up of other investment partners (instead, it's the CFO, treasurer and other corporate leaders) and therefore the testosterone-filled competitiveness of the dreaded "partnership meeting" did not exist.

The industry is a pattern-recognition industry, and - as Vivek points out in a WSJ article he wrote - pattern recognition can become code for sexism. One women VC I interviewed in advance of the panel shared with me that "Whether we like it or not, females act and are different than males, and I believe that lack of pattern recognition makes it harder to push through. So, partnerships need to make a conscious effort to not jump to conclusions when a colleague does something different – rather push themselves to look at results, not merely the path." Entrepreneur-turned-VC Heidi Roizen wrote a scathing blog post about her own experience last week that touched on this theme called "It's Different for Girls". It may be easy to dismiss Heidi's stories as what happened in the past, but in talking to my women colleagues at Flybridge, I hear similar stories, including senior VC men using their power status as a tool to hit on younger VC women. This puts the woman in a no win situation. On the one hand, these interactions can represent legitimate networking opportunities to build relationships across firms with potential mentors. But on the other hand, these interactions might put them in an awkward situation and further damage their reputation if and when it is clear that the meeting is not purely professional in nature.

I raised the question whether we needed an explicit, organized Affirmative Action program in the industry, modeled after what elite universities have successfully executed on to ensure diversity and gender balance in schools. I have floated this around to a few other women VCs in recent weeks and get mixed feedback. Some have said it is absolutely necessary and would bring great focus and attention on the issue, forcing different conversations when sourcing and hiring VC professional talent. One woman VC friend pointed out that a big part of being a VC is confidence - confidence in your investment judgment, in the board room, in the partners meeting - and that women already have "Imposter Syndrome" and can lack that confidence. Having an explicit Affirmative Action program might serve to only further undermine their confidence in the business.

There was a lot of discussion about how to make sure we fill the pipeline (i.e., recruit junior women into the business from business schools and industry) and then do not lose talent as they progress. There was good debate back and forth about whether the job was conducive to raising a family. Many thought it was given the flexibility over your schedule, but the cultural dysfunctionality needed to be addressed to make the work environments more supportive to women having kids while serving as venture capital professionals. Many high end professional services firms seem to have figured this out (e.g., Goldman, McKinsey, BCG) so why can't VCs? On this point, we have some interesting case studies of the five women investment team members we have hired at Flybridge, one became a VC partner at another firm (she moved to Europe for personal reasons) and just had her first child, one became an executive at a portfolio company she helped us find shortly after she had her first child, one started her own advisory firm to start-ups while raising her kids. One is graduating HBS next month and one is with us.

As with any hard problem, there is no silver bullet. But asking hard questions is what VCs are supposed to be good at, and this is an area where some really hard questions need to be asked. More to come, I hope.

May 08, 2014

When we make an investment decision at Flybridge, it is typically because of the intersection of two forces: (1) a top-down thesis about a compelling market opportunity; and (2) a bottoms-up discovery of a compelling team that is pursuing something that rhymes with our top-down thesis. We are not unique here, but we try to apply a fair amount of rigor to the process so that when we interact with entrepreneurs in our target market sectors, we can demonstrate to them that we understand their businesses and have insight into the opportunities they're pursuing.

Last week, we closed a new investment in an online education company, our second new investment in this space in a month. Since these investments were the result of a few years of analyzing the market and working with a few other portfolio companies in online education, we decided we would “open source” our thinking in the spirit of “hacking education.” Or perhaps more appropriately, “fracking education” in order to shake it up to release the energy needed to transform this ossified system.

Many others have observed that the $1 trillion education market is undergoing massive disruption. Paying $500,000 for a four year college experience that does not prepare students for the job market is no longer a winning proposition. Most K-12 schools are stuck in a silo mentality, implementing a rote learning model on a schedule that was designed for an agrarian society. And flaws in vocational training and workforce development have led to a massive jobs mismatch – there are millions of unemployed yet also millions of unfilled, open jobs. Many exciting initiatives are being created by entrepreneurs to address these issues – Khan Academy and EdX stand out in particular – but we are still very early in the process of the education revolution.

All the energy and enthusiasm for ed tech is translating into dollars. CB Insights recently reported that early stage edtech investing has grown substantially from a few years ago. As an investor, you never like to see a sector get overfunded. But this one is so large, and has so much room for further disruption, that we feel as if there still remain many exciting new opportunities.

Jeff’s first foray in the education space was as an entrepreneur cofounding Upromise, a company dedicated to helping millions of families save money for college. At Upromise, Jeff saw firsthand how the spiraling cost of college was harming the middle class. Our investment in SimpleTuition (aka ValoreBooks) in 2006 was a derivation of this insight – to help millions of students engage in ways to save money by accessing less expensive textbooks and loans. The company now works with over half of all college students in America and growing rapidly. In 2010, we invested in Open English, a direct to consumer online English language learning service targeting the growing middle class of Latin and South America. The company has built an enduring brand in the region and serves tens of thousands of students, providing access to a rigorous academic program and live instruction all from the comfort of home.

In the last few years, hundreds of entrepreneurs and startups have emerged to create companies to take advantage of all cracks and fissures in the market. As part of our analysis of the space, we systematically mapped the sector (tracking 100’s of startups) and created a hierarchy to help categorize the various facets of the industry and hone in on what areas we find most exciting.

In the Prezi below, you’ll find an outline of our Ed Technology Market Map, broken into digestible chunks. Here is what the high-level framework looks like:

We found we could categorize various companies in the broader edtech theme based on two dimensions: who the customers are (consumers/students, teachers or schools/enterprises) and what age segment they sell into (K12, higher ed, adult + lifestyle and professional). In each cell you will see examples of the types of companies that fit the segment - these are broken out in much more detail with extensive competitive mapping in the Prezi.

You will notice that four of the cells above are shaded light blue. This wasn’t by accident: these are the areas that we, at Flybridge, believe represent interesting investment opportunities. That’s not to say great companies won’t be built in the grey-shaded cells, it’s just that, in our analysis, these sectors tend to be more difficult or more played out than those in the blue.

This thesis and map is not intended to be the be-all-end-all of edtech investing. Part of our goal in publishing this is to solicit feedback and help further refine our view of the landscape - something that we, as investors, must constantly do. We welcome feedback, thoughts and criticism of all sorts. Most important, let’s figure out a way to hack – and frack – this broken system.

April 26, 2014

Apologies to readers of my blog who care only about my writings on technology and entrepreneurship, but I was compelled to write a more personal post in honor of the 50th anniversary of LBJ's signing of the historic Civil Rights Act (a law some argue was "the single most important US law in the 20th century").

In celebration of the anniversary, we took the opportunity this week to take a family trip to Alabama, Mississippi and Tennessee to expose our kids to this poignant history. The things we saw, the people we met, the conversations we had as a family inspired me tremendously. I am sharing a few highlights in the event that anyone else is interested in exploring this part of the country and this influential chapter in American history. By the way, if you haven't seen it yet, I highly recommend All the Way, the powerful play starring Bryan Cranston about LBJ's first year in office and his amazing efforts to pass the Civil Rights Act.

After flying into New Orleans (and, yes, having some fun there), we started our trip at Beauvoir in Biloxi, Mississippi - the retirement home of Jefferson Davis after the end of the Civil War. It was a fitting place to start: the Union won the war and the slaves were declared free, but the impact from centuries of discrimination and segregation remained. Below is one of the t-shirts they sell at the gift shop there, which spurred a vigorous discussion with my kids about why the Confederate flag is indeed so offensive and why there is such powerful controversy surrounding it.

We then drove to Montgomery, Alabama where MLK did so much of his good work. Montgomery is a pretty barren city, but the sites are amazing and many are quite new. The Rosa Parks Museum, located precisely at the bus stop where she got on and sat in the middle "white section", is an absolute gem. The kids were mesmerized by the exhibits that provided a visual reinactment of her quiet courage in standing up to years of injustice. It was particularly powerful to stand in front of the state house where Governor George Wallace was sworn in (102 years after Jefferson Davis was sworn in as President of the Confederate States at the very same spot) and declared in 1963 "segregation now, segregation tomorrow, segregation forever". Right across the street is the Dexter Avenue Baptist church where MLK pastored for seven years. Around the corner is the Southern Povery Law Center, which had a beautiful exhibit about fighting for social justice, culminating in one of my favorite Eli Wiesel quotes, which my son captured below. In reward for its good work, the SPLC staff shared with us that they have received 30 bomb threats in the last 20 years.

From Birmingham, we drove to Selma to walk across the Edmund Pettus Bridge, where MLK and other leaders crossed to kick off a 5-day, 54 mile march from Selma to Montgomery. The march occurred in March 1965 - nearly a year after the passing of the Civil Rights Act but at a time when voting discrimination remained rampant. The march resulted in LBJ submitting (and eventually passing through Congress) the Voting Right Act only a few days later. Here is a moving excerpt from his speech to a joint Congress:

Even if we pass this bill, the battle will not be over. What happened in Selma is part of a far larger movement which reaches into every section and state of America. It is the effort of American Negroes to secure for themselves the full blessings of American life. Their cause must be our cause, too, because it is not just Negroes but really it is all of us who must overcome the crippling legacy of bigotry and injustice. And we shall overcome.

After Selma, we drove to Brimingham, Alabama and had the privilege of attending the Sunday Easter service at the famous 16th Street Baptist Church. Over 200 parishoners were there to celebrate the holiday and we enjoyed meeting many of them and participating in the service. One 81 year old man shared with us his personal connection the four young girls who were killed in the 1963 bombing at the Church. This bombing contributed to the national outrage that led to the passing of the Civil Rights Act.

We then drove to Oxford, Mississippi to visit Ole Miss. Ole Miss was finally integrated in 1962, thanks to the courage of James Meredith and with the support of 500 US Marshalls that JFK had to send to force the issue with the intransigent Mississippi governor. There is a statue of Meredith on the campus and a beautiful tribute to him. Shockingly, his statue was found just a few months ago with a noose around it and wrapped in a Conferederate battle flag.

Finally, we drove to Memphis and visited the Lorraine Hotel where MLK was tragically assassinated. The hotel has been converted into a comprehensive, newly renovated National Civil Rights Museum, with exhibits that track the history of slavery through emancipation through the 1960s all the way up to today's civil rights issues. I was particularly pleased to see the focus on some of the modern civil rights causes, such as immigration reform. I was also touched by a video about a non-profit called Black Girls Code, which I'm looking forward to learning more about.

The trip was overwhelming and moving. It prompted conversations with our kids about the modern issues of income inequality. For example, my 17 year old daughter asked me at one point: "Why do certain jobs pay more than others?" which led to a rich discussion about income, justice and the free market. It raised conversations about bigotry in our community in our time, not just historical acts of bigotry, and it expanded their horizons in a way I had not anticipated.

If anyone wants to get advice about taking a trip like this, let me know. One of our favorite non-profits, Facing History and Ourselves, was a great resource for us as they led a similar trip for their board in 2001. We loved being exposed to Southern Hospitality (everyone we met was very kind and welcoming), learning about our history, celebrating how far we have come in 50 short years and recognizing that we have more work to do in the years ahead.

April 10, 2014

As a venture capitalist, I spend my time thinking about talent. Who are the best people in the world to invest in? How do I help them attract the best people in the world to team with them to build their companies into massive successes from scratch?

That is why I have been so frustrated with our country's backward immigration system. For me, as the son of an immigrant entrepreneur, it is a combination of a social justice issue and an economic pragmatism that has led me to be so passionate and engaged in reforming our broken system.

In the last few months, as I watched Washington DC fumble around with a comprehensive immigration reform bill (passed in the Senate, floudering in the House), I began to wonder if something might be done on a local, state level to address this issue. Massachusetts has a pro-business Governor and Legislature, an Innovation-heavy economy, and a history of successful public-private partnerships. Surely we could figure something out while we wait for the Washington politicians to go through their machinations?

Thanks to the help of a few talented immigration lawyers - Jeff Goldman and Susan Cohen - and a dedicated group of public servants - led by Greg Bialecki and Pamela Goldberg - an idea emerged to address this issue head on in an innovative way that is consistent with the federal rules and regulations, but allows the state to attract and retain international entrepreneurs.

The idea is a simple one: create a private-public partnership to allow international entrepreneurs to come to Boston and be exempt from the restrictive H-1B visa cap. How is it possible to do this? The US Citizenship and Immigration Services Department (USCIS) has a provision that allows universities to have an exemption to the H-1B visa cap. Governor Deval Patrick announced today that the Commonwealth of Massachusetts will work in partnership with UMass to sponsor international entrepreneurs to be exempt from that cap, funding the program with state money to kick start what we anticipate will be a wave of private sector support.

This innovative program has tremendous potential. For Massachusetts, it means we are sending a message to entrepreneurs around the globe that we want them to come here to start and scale companies. For other states, it is a model that can be replicated if local leaders from the private and public sector can come together and cooperate to work out the details to launch and operate this program, as we have done over the last few months.

This year will be a pilot year (with a nod to the Lean Start Up!) and I'm sure we will learn a lot along the way, but I am super excited about the potential that this program presents for the state and the country as a whole.

For the last few years, many leaders in the Massachusetts innovation community have been arguing that non-compete agreements should be eliminated. Article after article has been written in support of putting this policy forward to increase the dynamism of our ecosystem and send a message to the broader innovation community that Massachusetts is a great place to start and develop your career.

Many studies have shown that non-compete agreements reduce R&D investment and stifle innovation. MIT Professor Matt Marx conducted a seminal study in Michigan that showed that the enforcement of non-competes caused a sharp drop in mobility for inventors, thereby slowing innovation and economic dynamism. Professor Mark Garmaise of UCLA published a study which had similar findings and, further, assessed the state by state use of non-competes, concluding that Massachusetts had one of the strictest in the nation (see chart below from Highland's Paul Maeder, putting states on a 0-9 enforceability index scale).

Today, Governor Deval Patrick is officially proposing to change all that by putting forward legislation that will eliminate non-competes outright. If passed, this has the potential to eliminate a huge barrier to the free flow of talent to the best opportunities, thereby creating a more dynamic entrepreneurial environment in the state.

I give tremendous credit to Spark Capital's Bijan Sabet, who first raised this issue seven years ago. Many legislators and leaders got behind the effort, but no one has been able to galivinize enough support to convince the governor to lead here. Greg Bialecki and Jennifer Lawrence have made that happen and the tech community will be forever grateful if the legislature will embrace this effort, even if in the face of big company opposition.

House Speaker Robert DeLeo has been a champion for the innovation economy for years, kicked off by his (somewhat cheeky) open letter to Mark Zuckerburg to urge him to open a Facebook office in Massachusetts. Let's hope he's willing to support legislation that makes it easier for the next Mark Zuckerburg to leave his or her job to start the next Facebook...without the fear of old-school shackles and reprisals.

March 30, 2014

When the Cold War ended, President Bush (senior) used to talk about the peace dividend, the downstream economic benefit of reductions in defense spending. Echoing these words, one of my CEOs declared to me the other day that last week's activity in the cloud may have been one of the most important weeks in technology history, but we won't realize it for many years to come.

At Flybridge, we have long believed that the advent of cloud computing is the most important force in technology in decades. The entire Lean Start-Up movement and the recent proliferation of start-ups has been enabled by cheap computing power and storage. When I was an entrepreneur starting my company, Upromise, we had to buy big Sun servers for millions of dollars to launch our fledging website. Today, that same compute power is available to start-ups for a mere handful of dollars per hours.

Historically, Amazon's cloud offering (Amazon Web Services, or AWS) had little competition and, as a result, some have observed that as amazing as the cloud has been for start-ups, cloud pricing has not dropped as aggressively as Moore's Law would have suggested it might.

But Google finally appears to be catching up in the ever-important cloud services area. Last week, at its Cloud Platform Live conference, Google slashed pricing on their cloud platforms over 50%.

Then, a day later, at its AWS Summit, Amazon countered with its own radical price cuts from 36-65%. Despite those price cuts, Google is still cheaper than AWS in many categories. See the chart below, which GigaOm published, to show the comparison of the two offerings.

So why did my portfolio company CEO think this last week of price cuts was so historical? Because cloud infrastructure is like fuel for startups. As startup fuel prices go down, the downstream effect is powerful: starting and scaling companies has gotten yet even cheaper. With Google and Amazon battling it out, and IBM and Microsoft and others not far behind, this trend is only going to continue.

We have made a number of direct investments on companies circling around cloud infrastructure, startups like MongoDB, Stackdriver, Firebase and Apiary, to name a few. But what last week's price wars demonstrate is that the entire technology ecosystem will reap indirect benefits as well. The cloud is becoming a commodity, prices are going to zero, and technology companies around the world are celebrating.

March 27, 2014

When this 10s decade is over, we will look back and be amazed that a mere ten years prior, a few, absolutely massive financial institutions controlled the global banking industry. Software is eating the world, as Marc Andreessen famously observed, and an industry like financial services -- whose service offering is essentially all information-based -- is particularly susceptible to the disruptive force of technology. That disruptive force is particularly acute in the credit markets.

Consumer credit has long been a pretty sleepy industry. For years, the same 5-10 or so banks have been the main issuers of credit cards and the same 4 associations have been the main brands and platforms. But when the credit crisis hit, everything changed. Due to market forces and government regulations, banks abandoned the lower end of the consumer market. 20% of US households are now considered underbanked, representing a massive market opportunity. A further window of opportunity is the fact that credit cards are still charging 20% APR, yet interest rates are effectively zero.

Stepping into the vaccuum are new providers of consumer credit and broader banking services that are 100% virtual. ZestFinance (a Flybridge portfolio company) and Wonga are among those providing consumer credit in the form of installment loans, with ZestFinance leveraging the magic of big data to do more sophisticated underwriting. Lending Club and Prosper are showing the promise of peer-to-peer lending, issuing $2.4 billion in credit last year, a 3x increase over 2012. Institutions are taking notice - one investor that I spoke to in a peer to peer lender shared with me that hedge funds are now flocking to the platform in search of higher rates. ING - soon to be renamed Voya Financial - demonstrated that a bank could be constructed that serviced consumers over the Internet without traditional branches.

At the same time, the proliferation of smart phones is allowing consumers to access money and conduct financial transactions with extraordinary convenience. Why would those services and capabilities be only provided by traditional banks? China's Alipay reports that they processed $150 billion in mobile transactions in 2013 - nearly 6x the $27 billion PayPal reported (not including the Venmo acquisition, which is bound to accelerate growth in 2014). This intersection of mobile, convenience and new lending brands is going to substantially erode existing banking franchises in the years to come.

The business lending market is no different. In fact, innovation in business credit may be outpacing consumer credit. Startups such as OnDeck Capital, Kabbage and Capital Access Network have each raised tens of millions of capital and are building large brands and franchises in servicing small businesses. With their bloated bureaucracies and overhead, banks are not architected to service this market effectively - particularly as more and more small businesses are reachable over the Internet. OnDeck recently reported a $77 million growth round and that it has acheived nearly $1 billion in loan volume. Kabbage is rumored to be on the verge of reporting a similar monster round. And Credit Karma, a credit management service for consumers, just announced an $85 million growth round.

A few weeks ago, Brand Finance released their annual survey of the 20 most valuable banking brands in the US. Atop the list were the usual suspects: Wells Fargo, Bank of America, Citi and Chase. The market capitalization of these four banks is currently around $800 billion. Will these same brand franchises be unassailable by 2020, or will a new cohort of brands emerge from this soup of startups and innovators? I know what venture capitalists and entrepreneurs are betting on.

March 05, 2014

Every year for the last four years, Fred Wilson has been kind enough to come up from NYC and join my Harvard Business School class. It is always entertaining, enlightening and fun. As always, I asked the 80 students in the class to live tweet during the class in order to capture the interesting nuggets and take-aways (and exercise their social media muscles). Below is a Storify of the tweet stream.

February 12, 2014

And the defining project of our generation is to restore that promise."

- President Obama, 2014 State of the Union

In a past blog post last summer, I fretted that the latest wave of innovation - as amazing as it is - was not showing up in US worker productivity. At the time of my writing, the US Bureau of Labor Statistics had provided some pretty depressing data, with very modest productivity gains in 2011, 2012 and Q1 2013.

Fortunately, in the last year, the productivity numbers have shown a major uptick. It appears that our society and our businesses are getting more adept at absorbing all the new technology of the Internet Revolution. Unfortunately, the beneficiaries of the greater productivity - presumably driven by the boom in cloud computing, precision manufacturing, wireless broadband and other major infrastructure improvements - are America's elite.

A recent analysis by one of my favorite economic pundits, John Mauldin (who tends to be pretty conservative in his political views), provides some good data that drives this conclusion home. The chart below shows that full-time, full-year wages for male workers (presumably the female statistics would be clouded by a narrowing of the gender wage gap over this period) have grown strongly for the more educated workers over the last few decades and dropped dramatically for the less educated workers.

Further, if you take a close look at the jobs that are likely to be further impacted by our massive, secular shift towards automation, they are the very jobs that middle and lower educated workers hold. The chart below characterizes how disruptive technology will be to certain job categories.

Politicians are spending a lot of time talking about the inequality problem in America. If you consider how much automation and software disruption that is ahead of us, it is clear that the problem is about to get much, much worse.

What role will the technology industry play in dealing with the societal implications? I hope a large and positive one. The industry can not allow itself to be represented by the Tom Perkins of the world. Leaders in the technology industry need to step up and own the inequality problem.

That's not to say technology leaders should be slowing down our march towards disruption. As economist Joseph Schumpter pointed out, creative destruction is a powerful, positive force. But tech leaders need to work hard to improve the underpinnings of our education system (see Khan Academy), broken immigration system (see FWD.us) and other aspects of our society such that creative destruction does not equate to opportunity destruction. I love it when I read about tech leaders getting more engaged in policy and civic activities. Let's see more of it.

February 05, 2014

I love dressing informally, maybe too much. My wife frequently reprimands me for dressing down. I recently met with a US Senator in slacks and a collar shirt (which I thought was being respectfully dressy!) and he wryly cracked that I looked awfully comfortable. I sometime teach my HBS class in jeans (please don't tell the dean).

But lately, I have been wondering if entrepreneurs have taken informality too far. I don't mean dress code. I don't care how they dress. I mean their thinking and approach.

You probably see it all the time - hipster entrepreneurs with the cool affect walking into meetings carrying nothing but their smart phone. When asked to present their story, they ramble informally without a cogent direction. When a substantive discussion ensues, and good ideas and follow-up items are generated, they take no notes. And when the meeting wraps up, there are no action items that are reviewed, no closure regarding next steps.

My observation is that some entrepreneurs are confusing informal dress with informal thinking. I like dressing informally because I find it reduces barriers and allows for more direct, open dialog. I have noticed that people are more comfortable getting right to the point and being candid in their conversations when there are no hierarchies or barriers communicated through dress code. Studies reinforce this view.

But I can't stand sloppy, informal thinking. Crisp, logical discussions, well-organized meetings, good note-taking and dogged follow-up are all ingredients of successul, well-run companies. When a startup entrepreneur conveys the opposite in their approach and style - whether in a pitch meeting or in a board meeting - I question whether (to coin a phrase I learned at my first starup) they can operate their way out of a paper bag.

I sat on a panel this morning at an executive retreat for a Fortune 100 company focused on innovation and the impact of next generation technologies on their business. The company's president wore jeans for the first time in a business meeting and was getting some good-natured teasing from his staff. I loved it because it showed he was willing to knock down some walls. But you can bet the meeting started on time, ended on time and had a very clear agenda.

January 25, 2014

I was excited to see Care.com's successful IPO yesterday for multiple reasons.

First, it augurs well for 2014 as another strong IPO year in genearl and for technology companies in particular. A University of Florida professor has a nice analysis of the 2013 IPO market and shows that there were 146 IPOs in 2013 (51 VC-backed, although NVCA claims 82 VC-backed), up from 94 in 2012 (48 VC-backed) which had been in turn up from 81 in 2011 (44 VC-backed). Another excellent IPO analysis from Fortune showed that the real winners of 2013 were the class of 2012 IPOs, which have traded up 64% by year end 2013.

Second, it is another nice win for Boston. Despite a flurry of biotech and enterprise tech IPOs and big M&A events in the last few years, there have not been many consumer wins in Boston and Care.com is a nice one for the region (see my post: "Boston Unicorns").

But what really makes me happy about the Care.com is the people behind the company. The five founders (Sheila and Ron Marcelo, Dave Krupinski, Donna Levin, Zenobia Moochala and Diane Musi) worked with me at Upromise and I think the world of each of them. They started the company with a mission-driven vision and have stayed together as a tight-knit founding team from the onset.

One of the things that makes a startup region successful is when a successful exit happens and an alumni network forms that creates additional successful startups (i.e., the "PayPal mafia" effect). This happened in my first company, Open Market (IPO'96), which spawned a dozen CEOs/founders in the area (e.g., Gail Goodman/Constant Contact, Jon Guerster/Digital Lumens, Eswar Priyadarshan/Quattro Wireless and m-Qube, Ted Morgan/Skyhook Wireless). BostInno did a nice piece on the "Open Market Mafia" and has a whole series they call "Tech Mafia Mondays"). I am so happy to see it happening with the Upromise alumni network as well, which includes CEOs/founders like:

December 27, 2013

A year ago, I felt 2013 would be the Year of Grit - a year characterized by toughing things out in uncertain times. Well, we certainly did that, and 2013 has ended up looking a heck of a lot better than it began.

2014 is shaping up to be the Year of Results. We begin 2014 with a lot of optimism in the air. In a recent survey conducted by the NVCA, portfolio company CEOs and VCs are feeling as good about the future as they ever have, with a stunning 86% of CEOs who plan to raise capital saying it will be the same or easier to do so as compared to last year. Half of CEOs and VCs are optimistic about next year's exit environment.

A rising stock market makes everyone feel good. The NASDAQ is up 30% this year and achieved its highest level since September 2000. The S&P has closed at a record high 44 times in 2013 and the Dow Jones has achieved 50 record highs this year - both indexes are up more than 20%.

When the stock market is down, we VCs like to say that our little tech companies are not affected and simply keep their heads down and build valuable companies. But when the stock market is up, sentiment swings quickly. We rush to take companies public or sell them to take advantage of "the exit window". It is natural, therefore, that a robust stock market has led to a robust IPO market. More and more companies are eyeing 2014 and research conducted by analyst firm 451 suggests it will be a record year for tech IPOs and also suggests M&A will see a strong increase in 2014 as compared to an already solid 2013.

Now it is time to deliver on all that promise. Aileen Lee's now-famous unicorn analysis listed 39 companies founded in the last 10 years who had achieved $1 billion plus valuations. 12 are private companies (Palantir, Dropbox, Pinterest, Uber, Square, Airbnb, Hulu, Evernote, Lending Club, Box, Gilt, Fab.com). At least another dozen with very lofty private valuations wait in the wings (including Spotify, MongDB, Snapchat, Etsy, Actifio, Automattic, OPOWER, Hubspot, Flipboard, Hootsuite, Appnexus and many others). Not all of these companies will go public or sell out in 2014, but a good number need to in order to deliver on the promise that has been built up in this post-bubble, post-recession era.

And if you are worried about bubbles right now, don't. I wrote a blog post two and a half years ago in response to cries of a bubble that it felt a lot more like 1996 than 1999 right now. In other words, when analyzing unemployment rates and other macroeconomic fundamentals as well as positive structural elements of the tech economy, the rebound was just beginning and had a good 4-5 year run in front of it. Sitting here at the end of 2013, I still feel that to be the case. The fundamentals of a rebounding US economy in combination with the disruptive forces of the cloud, mobile, big data and software eating everything remain strong. The start up economy will overheat at some point, it always does, but that point is not now.

So, buckle up for 2014 - a year where many of those lofty promises of better times over these last few years begin to convert into tangible results.

November 30, 2013

Last week, I used Aileen Lee's excellent TechCrunch article on Unicorns as a jumping off point to analyze the role of the MBA in creating these unusually valuable companies. This week, I want to take a local lens and analyze these special companies that have been created in Boston. As was the case last week, I was ably assisted by HBS 2nd year MBA student Juan Leung Li.

In order to have a reasonable population of companies to assess, we tweaked Aileen's definition. We looked at the companies in New England (call them "Boston and surrounding") that had exited in the last 10 years (2003-2013) with greater than $500 million in market valuation. Some of these companies had been around for a few years, but we felt this slice would allow us to assess companies that had recently created extraordinary value in a relatively short period of time. In the case of M&A situations, we value the company at the time of the M&A. In the case of public companies, we valued the companies at the market close of 11/15/13.

We found 50 such companies (updated from 43 originally). That is, 50 companies in the Boston and surrounding area that had achieved > $500 million in value during the last ten years. 19 of these had achieved > $1 billion in value (Aileen's cut off, although she had constrained the founding date to the last ten years rather than the exit date, which obviously yields a broader population). A chart showing these 20 companies can be seen here:

Lack of Massive Winners. The perception that Boston has not recently generated massive wins appears to be only somewhat accurate, depending on which sector you focus on. Of the 19 companies that were > $1 billion in value, seven were greater than $2 billion (TripAdvisor, athenahealth, IPG Photonics, Alnylam Pharma, Starent, Boston Biomedical, Acme Packet). That said, only three of these companies are software technology companies - TripAdvisor ($12.5B), athenahealth ($5.0B) and Starent ($2.8B) - and they were founded in 2000, 1997 and 2000, respectively. In other words, there have been no multi-billion dollar valued tech companies founded in Boston in the last 13 years. There are three companies that have achieved >$1 billion in value in the tech sector founded in the last 10 years: Demandware ($1.9B/2004), Kayak ($1.8B/2004) and Fleetmatics ($1.4B/2004), although the latter was founded in Dublin.

Essential Role of Immigrants. Here was a statistic that blew me away: over half of these companies (51%) had an immigrant founder. In my research related to my Senate testimony on immigration reform, I noted that 40% of Fortune 500 companies had an immigrant founder. Apparently, successful Boston-based startups have an even greater concentration of immigrant influence.

Strong Diversity. The breadth of the Unicorns is impressive, reinforcing the view that Boston's startup ecosystem is one of the most diverse in the world. Of the 50 companies that achieved > $500M in value, 23 were life sciences (plus materials science), 22 enterprise technology and 5 consumer technology. To see the companies in their various segments laid out, see the chart below:

Much of this data refutes the belief that all the major startup winners have been created in Silicon Valley. In fact, the vibrant life science sector is now arguably more heavily concentrated in Boston than in any other cluster at any other time in history. That said, Boston has definitely come up short in the race to build massively valuable tech companies. And if you want to build a consumer Internet company, there are few role models.

However, I am quite optimistic about the future. As evidenced by this review of the Boston startup ecosystem, the quality and robustness of the environment has improved greatly in the last few years. As for big winners, the pipeline looks pretty good. Globoforce and Care.com have filed to go public and companies like Acquia, Actifio, DataXu, Dyn, Hubspot and Wayfair and are all reputed to be on a similar path in the next year or two.

If you want to see the entire spreadsheet with the underlying data, you can click here.

November 25, 2013

I like being a contrarian. As a kid, if a certain TV show was popular amongst my buddies, I’d purposefully ignore that show and search for other shows that were less well known (e.g., Hogan's Heroes was a personal favorite that never hit mainstream). When someone declares something is conventional wisdom, I look to poke holes and challenge the underlying assumptions.

Recently, the conventional wisdom in Startup Land has been that young, technical founders are the prototype for creating valuable companies. The formula, this theory goes, is to find a hacker in a hoodie and bring out the wheelbarrow of cash to back them. Think Mark Zuckerberg/Facebook, Drew Houston/Dropbox, David Karp/Tumblr and – the most recent poster boy darlings of Startup Land – the SnapChat founders.

I have always thought that stereotype was skewed. Don’t get me wrong – I love young founders. At Flybridge, we have invested in many of them (e.g., Eliot Buchanan and Dan Choi at Plastiq) and we plan to continue investing in many others. But in my twenty years living in Startup Land, I have found that there is no single model or archetype for success. Success comes in many flavors and combinations. And, in my last five years on the HBS faculty, I have become more convinced of the value of the MBA entrepreneur.

Thus, I was thrilled to read Aileen Lee’s terrific analysis of unicorns (companies that have been created in the last 10 years worth more than $1 billion) and have it shatter this piece of conventional wisdom. Aileen systematically analyzed the common characteristics behind this cohort of 39 companies and found that “inexperienced, twentysomething founders were an outlier. Companies with well-educated, thirtysomething co-founders who have history together have built the most successes.”

Aileen’s analysis didn’t provide any data on the role of MBAs in the unicorns. So, in partnership with HBS second year Juan Leung Li, we did some of our own digging. Here's what we learned:

33% of the Unicorns had at least one founding member who had an MBA. Examples include Kayak (Steve Hafner/Kellogg), Workday (Aneel Bhusri/Stanford and Dave Duffield/Cornell), Yelp (Jeremy Stoppelman/HBS) and Zynga (Mark Pincus/HBS).

82% of Aileen's Unicorns had at least one founding member or current executive team member with an MBA. Examples of unicorns where MBAs were hired to help build the company include Evernote (COO Ken Gullicksen/Stanford), Facebook (COO Sheryl Sandberg/HBS), Twitter (COO Ali Rowghani/Stanford).

Of those that had MBAs, the leading schools represented were: HBS (21%), Stanford's GSB (17%) and Wharton (10%).

This week, John Byrne of Poets & Quants published a complimentary analysis, ranking the top 100 MBA Start-Ups. In this analysis, he found some terrific companies that have been MBA founded in the last 5 years, such as Okta, Rent the Runway, Warby Parker and Wildfire. Among this MBA founder list, HBS (34%), Stanford (32%) and MIT (11%) came out on top.

Why all the momentum with MBAs and start ups? Simply put, the major schools have radically changed their curriculum. These schools and others have become super-focused on training their MBAs to be effective executives across a range of company sizes, from start-ups to large enterprises. For example, HBS now teaches two courses to help train students to be effective start-up executives: Launching Technology Ventures (which I teach) and Product Management 101. MIT is considering offering their own version of these classes in the spring or next year and Stanford has a plethora of strong course offerings for future start-up executives.

So the next time someone tells you that you need a hoodie to be a great start up entrepreneur, don't be afraid to flash your MBA diploma with pride.

October 24, 2013

The art of Product Management continues to evolve. I've enjoyed spending time with many VPs of product in the last year since I co-authored an HBS note on the role of the Product Manager to develop more insights, materials and case studies on that revolution.

Earlier this week I taught a seminar on product management to MIT Sloan students as part of their "Sloan Innovation Period (SIP)" curriculum. Although it's not exactly the EdX experience, in the spirit of open courseware, I thought others interested in the topic might enjoy the materials I used for the class, which are here:

October 09, 2013

I spent last week visiting Israel with a group of fellow venture capitalists touring Start Up Nation - a trip sponsored and organized by CJP. We had a terrific time - despite being in the midst of a pretty tough neighborhood, the country's innovation economy is absolutely booming. A recent report named Tel Aviv the second most vibrant start up ecosystem in the world, behind only Silicon Valley.

A few take aways from the trip provided us with some insight into why such a tiny country (population of only 8 million) is doing so well:

Big Winners are Emerging. There used to be a perception that Israeli start-ups had great technology, but were weak at growing sales and marketing and so had to sell out to bigger companies early in their lifecycle, precluding the opportunity to build very valuable companies. The success of Waze ($1B sale to Google), Wix (IPO filed), Outbrain (IPO rumored to be quietly filed or in process) have entrepreneurs on the ground thinking big. The Times of Israel reports these success stories are inspiring Israeli start-ups to focus on the IPO path rather than M&A as a potential path to greatness. I see this through the lens of our portfolio company, tracx, whose ambitions to build a great SaaS social intelligence company seem to rise with the country's ambitions.

Start Up Heroes. A culture is defined by its heroes. The American entrepreneurial narrative has been shaped and amplified by the oft-celebrated heroic journeys of Bill Gates, Steve Jobs and Mark Zuckerberg, among others. The Israeli narrative has gone from celebrating its war heroes (think Moshe Dayan, Ariel Sharon, the Mossad) to celebrating its entrepreneurs. I think we were told no less than a dozen times that Warren Buffet's largest international investment was in an Israeli company ($6B for Iscar) and yesterday it was reported that he is acquiring his third Israeli company. The country is bursting with pride at its latest Nobel Prize winner in Chemistry (now numbering 11 Nobel laureates in its 65 year history). Everywhere you go, Israelis want to tell you how smart and entrepreneurial they are! Unlike any culture I have ever seen, this country gets the value of raw intelligence.

Partnerships Matter. Knowing their position as such a small country, Israeli businesses are always looking to partner outside of Israel. Native Israeli venture capital represents only 25% of the VC capital invested in the market - most of the money is coming from global firms like Battery, Greylock, Lightspeed, Sequoia and others. The two recent partnerships from Israel's elite technical university, Technion, are manifestations of this open approach. First, the ambitious partnership with Cornell to build a new engineering school in New York City - called Cornell Tech - which appears to be off to a strong start, helped in part by a $133M gift from Qualcomm founder Irwin Jacobs. More recently and announced while we were on campus, Technion announced a joint venture with a Chinese university to build a new campus in Guangdong thanks to a $130M gift from Chinese billionare Li Ka Shing, a large investor in Waze, matched by the Chinese government.

September 30, 2013

I make a lot of lists. It’s an old habit that started when I
was in grade school. Lists of to dos,
lists of goals, lists of workouts. Lists, lists, lists. I’m also a nostalgic person and so I tend to
save a lot of these lists and use them as touch points for storing memories and
keeping track of the passing of time.
Every now and then I’ll come across an old list and re-read it. Some of them make me think deeply and others
make me laugh at my younger self’s absurdity.

Recently, I came across a list in my desk labeled simply
“Mentors”. I’ve had a lot of mentors in
my life – many who may not even know they played this role for me. I’ve always kept an eye on them and noticed
the choices they’ve made and how they’ve carried themselves personally and
professionally. A number of years ago, I
drew up a list of my mentors as it helped crystallize for me who I admire, why
I admire them and what I can learn from them.
It was fun to stumble upon that list again and reflect on my choices.

Reverse mentors are people younger than you who you admire
and learn from. Everyone on my mentors
list is older than me. That was my
traditional definition of mentor – someone ahead of you in life that inspires
you, helps guide you and show the way to live.

But when I read Barb’s reason for seeking out reverse
mentors – younger folks who she learns from in this rapidly changing, digital
world – it really resonated with me.
Entrepreneurship, technology and innovation are profoundly influenced by
the young. If you’re not tapping into their knowledge base and seeking their
insight on trends and opportunities, you’re missing out on a valuable
resource. Upon reflection, it’s one of
the reasons I so much enjoy the teaching I do at Harvard Business School. I learn a tremendous amount from the students
and they are always helping me think about the latest disruptive ideas,
technologies and companies that are emerging or challenging how to best go
about building start-ups to tackle these opportunities.

So now I’ve got my reverse mentor list. I’m tucking it away in my desk for another
few years and look forward to tracking the careers and choices of those on it.

September 08, 2013

Every year, I give an open talk to the returning students at Harvard Business School on what makes the Boston start-up scene special. I do it for two reasons: 1) as an advocate for the local innovation ecosystem, I want to make sure all these smart, talented folks from around the world can access and plug in to the amazing local resources available to them; 2) Boston is a microcosm of the ingredients for a successful start up community, a topic of great interest to policy makers and leaders all over the world (for more on this topic, see Brad Feld's excellent book, StartUp Communities). The city of Boston is a relatively small one (the 21st largest city in the US with a population of 600k and a combined metro area that ranks it 10th), yet it is consistently ranked as one of the most innovative clusters in the world.

I have written in the past that in the IT sector, Boston suffers from not having more "platform companies", such as Facebook, Google, Twitter, LinkedIn. As the above presentation shows, only a few companies in Boston are of the scale where they are platforms for other startups to plug in to and large enough to create their own industrial clusters. Hopefully, that will change in the coming years.

August 21, 2013

I’ve been thinking a lot lately about the unsung hero of
many start-ups: the other founder. A lot has been written about the founder/CEO
and her growth and evolution as a company grows. But little is written about the (nearly
omnipresent in my experience) co-founder – the #2, behind-the-scenes partner
who teams with the founder/CEO from the very beginning to build the company. In the image above, most everyone knows the name and image of Larry Page - cofounder and now CEO of Google. But how many folks know Sergey Brin (on the right) and the role he has played in building Google to its massive success and a market capitalization of nearly $300 billion? Sergey Brin is the other founder.

I’ve probably been thinking about this topic a lot lately because
I’ve been recently meeting with the other founder at a few of my portfolio
companies. The conversations we’ve been
having have a consistent set of themes.
The other founder usually begins with a particular range of
responsibilities that compliment the founder. They may run a
function, such as product or engineering, or they may have a broader
operational role and carry a COO title.
Typically, a 5 person company doesn’t need a COO, but it’s a useful catch all
title for the other founder because it sounds better than “vice president of
miscellaneous” or “SVP of whatever falls through the cracks,” which are more
accurate descriptions of their role.

The challenge for the other founder is that as a startup
evolves from “the jungle” (super early stages, chaotic organization, prior to
achieving product-market fit) to the “dirt road” (developing some
organizational maturity and initial product market fit), senior functional
executives often get hired from the outside to take over departments. These executives naturally encroach on the other founder's responsibilities.

For example, at one of my portfolio companies,
the other founder looked after administration, finance, operations, product
and engineering. Basically, everything but sales and
marketing. But then the company hired a VP of
operations. And then a VP of
finance. And finally a VP of
engineering. And suddenly, after
transitioning each function successfully to an outside senior executive one at
a time, the other founder had successively worked himself out of a job.

The board and investors are super focused on making the founder/CEO successful – building an executive team
around them, perhaps even a COO/president to compliment their skillset and help
the company scale. Or, as in the case of Google's hiring of Eric Schmidt, an outside CEO who can guide growth and scale. In these situations, everyone is focused on the impact on the founder - what his role will be, how he handles the transition. Very little board
attention is typically focused on the role, evolution and growth of the other
founder.

I would submit that ignoring the other founder is short-sighted. I recommend boards and CEOs spend more time
worrying about the role of the other founder and helping her successfully
evolve over time. Typically they are
intensely loyal to the company and the founder/CEO, valuable sounding boards
for the executive team and the founder/CEO and champions of the company culture
and mission.

Here are a few approaches or archetypes that I typically see
as the role of the other founder evolves over the life of a startup:

Become a functional owner. The other founder may be “VP of miscellaneous” in the beginning
days of the startup, but be explicit about which functional area she should
expect to own over time. That way, she can develop the skills in that area in a focused fashion and slot in
appropriately when the time is right.
Product management is a popular functional area for the other founder as
the other founder is typically close to the customer and business problem being
solved. Further, the role doesn’t
involve managing tens or hundreds of employees, a skill that is typically
better suited for experienced functional operators. Another one is business development for
similar reasons and because it involves selling the company into an ecosystem
of partnerships, requiring a blend of product knowledge and marketing skills.

Grow into the COO role. One successful portfolio company of mine had
two young, MBA founders. One played the
CEO/cofounder, Mr. Outside role and the other played the COO/cofounder, Mr. Inside
role. Even as the company scaled, the
young COO rapidly learned how to be a successful operator at scale. I have had other companies hire coaches to help the young other founder grow into the COO role. For the right profile, this can be a great role for the other founder.

Drive the next strategic
initiative. As startups evolve into
functional startups, they get very focused on the here and now: shipping the next product release, successfully
closing the next quarter, closing an important partnership. Yet, startups need to always worry about
what’s around the corner and have resources dedicated to strategic initiatives
that can provide non-linear growth. This
is an area where the other founder can be very valuable. Because of the respect he has within the
company and their ability to cut across functions, he is well positioned to
drive strategic initiatives and providing the “startup within a startup”
culture necessary to innovate.

This set of themes is one that I’m personally very familiar with
because I played this role at one of my startups, Upromise.
My title at the start was president and COO – thus I initially played the
Mr. Inside role and rapidly grew into running a large organization. Then, as we hired a skilled operational CEO,
I transitioned to driving strategic initiatives.

I guess that’s why I’m always a sympathetic ear for the
other founder.

July 11, 2013

In every start-up, finding initial product-market fit is a magical moment. Before this occurs, the sales process is a craft or an art - custom-made by the founder or evangelist sales VP. You dive deep into a customer development process, working closely with a few customers who feed you requirements and are willing to trial an imperfect product that is evolving quickly.

But once you achieve initial product-market fit and are down the Sales Learning Curve, suddenly you are faced with a new challenge: how do I scale up the sales efforts? How do I build a repeatable, scalable sales process that is like an industrial machine - not a crafts project?

Across our portfolio and in my own entrepreneurial experience, I have seen three main sales models work successfully in scaling B2B sales: 1) Enterprise; 2) Telephone; and 3) Developer-driven. B2C sales and customer acquisition efforts are a different matter (and one I'll perhaps address in a future blog), but for B2B, those three models are the most common pattern. I'll discuss each one below.

1) Enterprise Sales

The enterprise sales model is a pretty simple one and was the predominant model ten to twenty years ago in the IT industry. If you want to scale sales, you hire more sales reps. Find a new sales rep with industry experience, a rolodex and a strong track record. You assign an annual quota to each rep, train them, feed them some sales tools and assign them a sales engineer (particularly for more technically complex products) and coach them along the way. After 3-6 months, they work their way down the learning curve, close their first deal and are off to the races.

The typical quota for a sales rep varies by type of business model (SaaS vs. perpetual), product gross margin (e.g., 80-90% software products vs. 40-50% advertising products) and company maturity (e.g., a "jungle" stage company would have a lower quota than a "highway" company). Typically you want to see a 3x ratio between the contribution margin per rep (factoring in the lifetime value of the customer, or LTV) and the cost per rep to acquire that customer, fully loaded (i.e., customer acquisition cost or CAC).

For example if you have a 90% gross margin SaaS software product and assign a $1.1M in quota for a rep (i.e., $1m in contribution margin) that makes $250K at target and assume another $50k in benefits and travel costs and $30k in marketing and support costs for a total of $330K, then you have a 3x LTV:CAC ratio in year 1. Another rule of thumb for SaaS companies, some focus on "the Magic Number", which is the ratio of new sales to sales and marketing expenses.

If the customer is a recurring customer, then they are more valuable and a lower quota might be tolerated, although a separate group of account reps are often accountable and paid commissions for the renewal revenue. If the marketing support is greater and the product is more mature, than a higher quota might be assigned. In my former company, Open Market, we had rising quotas each year as we got more mature, from (if memory serves me) $1.1M to $1.3M to $1.5M to $1.7M to, finally, $2M in annual quota. Advertising sales reps, with a 40-50% gross margin, might have $3-5M in annual quota.

Although it is an excellent fit for complex enterprise-class solution selling, many people think classic enterprise sales, as a standalone go to market model, is broken. When you analyze it carefully, unless you can support large quotas due to very large deal sizes, it can simply be too expensive to hire senior sales representatives, distribute them around the country, set up offices and support them. Many are therefore proponents of a sales model that relies more on telephone-based selling, as described below.

2. Telephone Sales

The telephone sales model is based on a group of lower-paid, typically younger sales representatives that sit in cubicles next to each other and grind out call after call. To implement this sales model effectively, there needs to be a tight coordination between sales and marketing to generate qualified leads and to feed these leads to the sales organization. There also needs to be a large target universe of potential customers to justify the volume of calls - the model simply doesn't work if your target market pool is in the hundreds or even thousands.

Sales reps in this model may be closers or simply openers who qualify leads carefully and then hand them off to the closers (in this scenario, the telephone-based representatives are often called business or sales development representatives -- BDRs or SDRs). Many organizations will have two separate groups - a group of SDRs that are nurturing leads and conducting product demonstrations and a group of telesales reps who are closers. It is not uncommon for the SDRs to be right out of college or, at most, have only 2-4 years of experience and be earning base salaries as low as $30-40K. Their quotas may be as low as $400-500K, but their salary at target might be only $80-100K. With no travel budget and no field offices, the numbers pencil out nicely. The telesales team can also be a nice training ground for enterprise sales reps - a path that can be cheaper and less risky than hiring someone externally.

Generating a high volume of leads for the telephone sales rep is the key to making this model work. It is all about (highly qualified) leads, leads, leads. Leads may be through inbound marketing techniques (such as webinars, blogging, white papers or other forms of content marketing) or outbound marketing techniques ("smile and dial" against a list of prospects). The Hubspot folks (who are terrific in this area) estimate that each SDR in their mid-market group needs 150 leads per month to be productive and busy while for the small business team, they target feeding 2000 leads per sales rep per month. This is an appropriate number to figure out and model to help guide whether you need to ramp up marketing (demand generation) or sales (closing) as you scale.

To that point, a well-run telesales operation will be super metrics-driven. You can measure EVERYTHING - how many calls per day per rep, how many connects per call, how many positive conversations that lead to follow-up, how many demonstrations, how many proposals, etc. These measurements help with the "machine-building" process as you can more predictably assess how you are doing at any given time and where you need to focus your resources - more leads, more SDRs, more closers, etc. The best sales VPs of telesales operations are more like accountants than charismatic salespeople. If you hire a charismatic leader as your head of sales, make sure you hire a director of sales operations to support them. I never fully appreciated the value of this role until I saw it in action myself at Open Market where the director of sales operations managed all the numbers and operational details, freeing up the charismatic sales VP to hire, lead and close the big deals.

Alignment between sales and marketing is critical in any sales model, but under the telesales model it is even more critical. Organizationally, SDRs may even work under the marketing organization while the closers work for sales. Whatever the organizational configuration, the definition of a lead, clarity on the quantity of leads being targeted, and alignment on the quality of a lead required before handing off from marketing to sales are all key elements to work through. Marketing automation platforms are particularly helpful here so that you can track someone from website visit all the way down the funnel through close.

Again, there are many who believe even the telesales model is flawed and outdated. Hiring armies of young, inexperienced professionals and training them to become sales reps and operate in a "boiler room" style environment can be expensive. To achieve friction-free revenue (and who doesn't want friction-free revenue?), a third sales model has emerged which I'll call "Developer Driven".

3) Developer Driven Sales

My partner, Chip Hazard, wrote a terrific blog post on the power of developer-driven adoption, something we have seen play out very successfully at a few of our portfolio companies, but most notably 10gen (maker of MongoDB). As Chip points out, if you can architect your product as a platform (build APIs that are accessible to 3rd party developers) and get bottoms-up adoption from the development community, you can drive adoption without investing heavily in sales. Chip's examples are mainly from technical products (his main area of expertise), but this approach can be employed for any product where customers can trial, see value quickly and begin adoption without taxing your sales resources.

To do this effectively, you often need to employ a freemium business model - making it easy for a developer or customer to try your product for free, get set up and quickly self provision (ideally within 5 minutes) without ever speaking to anyone at the company. This provides the ultimate inbound marketing model - customers contact you when they have tried your product and are convinced it provides them with value. Once value is established and the product usage ramps up, you can hear the cash register ringing.

Instead of hiring telesales people, you hire "Community Managers" who arrange hackathons and meetups, actively engage the community on the forums, and shares relevant content through various social channels. When things are really working well in a developer driven model, developers are embedding your platform in their products and each developer becomes a marketing agent for the company. In effect, your developer support team becomes your marketing team.

Summary

The magic in developing a go to market strategy is that there is no "one size fits all" approach. Many companies will design their sales and marketing machine as a blend of each of these approaches. Use a developer-driven model to drive trial and inbound activity. Telesales to close high-volume, smaller deals. And then enterprise sales for the select strategic deals with average sales price (ASP) > $100K.

Different phases of your business will see more emphasis on one area than another. For example, many companies embark on a freemium model initially, then depend on inbound upsell, later hire a telesales team to ramp up the upsell process by adding outbound activities, then hire an enterprise team to close the big deals. Dropbox is an example of a company that has followed this path with tremendous results.

The main point is that you need to be as strategic and thoughtful in designing your go to market model as you are in your product or company strategy. Only then can you evolve from a crafts model to a machine.

I include a chart below from a recent board presentaiton from my portfolio company, tracx (a SaaS social intelligence platform) that frames the multi-stage process in a particularly clear manner.

June 27, 2013

Today's IPO by Tremor Video is seen by many as a harbinger for the adtech community (full disclosure: Tremor Video is a Flybridge portfolio company). Rightly so. Tremor is the first public offering of an adtech company since Millenial Media's IPO in April 2012. One can argue how successful the Tremor IPO was, and the broader industry implications, based on the first day's opening price and trading, but the real test of these offerings is what happens next - how companies perform and execute over the next few quarters.

One thing that is clear, though, is that the advertising community would be wise to keep an eye on the "tech" portion of "adtech". I have argued in the past that software is eating marketing. Simply put, technology is radically transforming the marketing function and the role of the marketing professional. The flow of advertising dollars into digital, addressable media is well-documented and well-understood. It is estimated that in 2013, $100 billion will be spent on digital forms of advertising, representing more than 20% of the total advertising market and continuing to grow rapidly in share (see chart above).

Less understood is that managing digital advertising is far more complex than its analog counterpart. Advertising agencies have retained their industry wide hegemony as a result of this complexity. With so many new technology vendors popping up and so many immature point solutions being deployed, the core competence of agencies has gone from being great at relationship managemnent to being great at technology platform management. As DataXu's Mike Baker likes to say, Mad Men have become Math Men.

But, in every industry, software improves and gets simpler and simpler. Technology platforms gain in scale, become more mainstream and training programs become more mature. As all this happens, agency services are required less and less.

So, the lesson that may get loss in the Tremor IPO hoopla? Agencies are being transformed. Technology companies are sweeping into the advertising industry, much like they did in marketing (see Salesforce.com, Eloqua/Oracle, Exact Target/SalesForce, Neolane/Adobe). And the days of getting the job done with thin technology in combination with armies of bodies are over. To be a valued, strategic player in the market, you had better have a thick, differentiated technology stack.

June 10, 2013

Think about all of the amazing technology innovation that has impacted businesses over the last three years. Since 2011, we have seen an explosion in cloud computing, in mobile, in technology-enabled business services and in globalization. All of us feel more productive as professionals and our businesses feel more productive instutionally. As a nation, the US must be cranking in productivity. Killing it -- particularly after rebounding from a recession, right?

In other words, despite three years of amazing innovation and growth, we don't seem to be gaining in productivity. What's going on?

In 1986, observing a similar phenomenon on the heels of the PC revolution, MIT Economist Robert Solow quipped: "You can see the computer age everywhere but in the productivity statistics."

Those of us that are immersed in the innovation economy may find this hard to believe, but we are not, as a whole, actually more productive when we are in the midst of an innovation cycle boom. New technologies take time to absorb, refine and make mainstream. Computer software can be reprogrammed quickly. Humans can't.

Forrester captured this phenomenon nicely in a chart they produced a number of years ago predicting "the next big thing" in computing:

We can't imagine a world without broadband wireless, iPhone 5s, iPads and the cloud. But we've got a lot of work to do to absorb these amazing technologies and make us all more productive as a whole.

May 23, 2013

Today is Demo Day for Techstars Boston. I love Techstars Demo Days for many reasons, not the least of which is the amazing community that gathers to hear the brief, well-rehearsed pitches from the various start-ups who have spent months planning for this big event.

As accelerators like Techstars gain in popularity, many entrepreneurs wonder whether they should be applying and, if admitted, joining an accelerator and when they shouldn't. I get this question a lot from my students, particularly as they're graduating and scrambling to figure out where they should start their company, how to raise capital and whether an accelerator is right for them. Here are a few guidelines that I would think about if I were an entrepreneur making such a decisions.

First, broadly speaking, accelerators serve a very valuable role in the entrepreneurial ecosystem. In many ways, as Eugene Chung of Techstars NY points out, they are like finishing schools for entrpreneurs. Like a college, there is a rigorous admissions process. And once admitted, the participant receives an extraordinarily rich education, in this case in the field of entrepreneurship. Also like college, the best accelerators represent valuable networks, where your "classmates" and even other alumni as well as boosters all become a part of your professional support system. Finally, the brand of the network will always be associated with your brand. Dropbox and Airbnb will always be known as "Y Combinator companies", which initially helped buttress their brand, and more in more is helping enhance the Y Combinator brand.

So with that in mind, here are a few reasons when I think an accelerator is a great choice for the entrepreneur:

Outsiders to the Entrepreneurial Community. You are early in your entrepreneurial career and want to super-charge your entrepreneurial network. To be clear, this is not a comment about age - you might be in your 50s and new to entrepreneurship. But, as Launchpad LA's Sam Teller observes, "Across the board, accelerators provide one key value: dramatically expanding your network."

Outsiders to the Particular Community. Every major innovation hub in the world now has an accelerator and most have numerous (Boston alone has over a dozen). If you are from outside that particular community, the accelerator is an amazing way to build a network in that particular city. As Brad Feld points out in his book on innovation ecosystems, there is tremendous power in being connected to a hyper-local, dense entrepreneurial ecosystem. Accelerators are magnets for the leaders in a given community - at Techstars Demo Days, it's always a "who's who" of that particular community. The quality of the mentors at the many events and one-on-one sessions over the are course of the program is outstanding - typically, you can't get access to these people any other way.

New to Fundraising. Accelerators pride themselves, and often measure themselves, on their ability to help their graduates raise capital. For example, across nineteen Techstars classes in its four year history, over 70% of all Techstars graduates have raised capital (Techstars publishes an amazing chart that lists every company in every class and their fundraising status as well as employee count). If you don't have existing relationships with investors, accelerators are great ways to establish instant credibility and an instant network.

That said, not all accelerators are created equal. Just like with a college, your personal and professional brand will always be associated with that particular accelerator, so choose wisely. Some accelerators specialize in certain domains (e.g., Rock Health for healthcare or Learn Launch for edtech). Others have stronger reputations for fundraising vs. product development.

If you want to get a sense of the quality of the particular accelerator you are considering, you should ask around about them - graduates, senior entrepreneurs, VCs, start-up lawyers, bankers and accounting firms will all have their opinions. One tech reporter, Frank Gruber, publishes an annual ranking of accelerators that is pretty good, although it leaves out hybrid organizations that aren't technically accelerators, like Boston's Mass Challenge (which is a contest) and NYC's First Growth Venture Network (which doesn't take any equity).

Accelerators are thus not for everyone. If you are already well-connected to a particular entrepreneurial community, have a entrepreneurial track record and network, and are comfortable with your fundraising skills and relationships, then an accelerator probably isn't worth it for you. But if those attributes don't describe you as an entrepreneur, an accelerator may be an excellent choice.

The immigration reform debate is near and dear to my heart and has whipped up the passions of many in the Innovation Economy, including Mayor Bloomberg, Mark Zuckerberg, and countless others. It feels like, finally, we may get some positive movement on this and I'm honored to have the opportunity to help in any small way I can.

April 16, 2013

I was born and have lived in the Boston area almost all my
life. I went to school here, met my wife
and married her here, built a family and pursued my career here. I am a rabid fan of all the sports teams and
love exploring and connecting with every nook and corner of this community. Never have I been more proud of the
resilience of my home town. Never have I felt more meaning in the statement: "I am a Bostonian."

In the Flybridge partners meeting this morning -- which was
held at one of our homes as our office is a part of the crime scene and in "lock down" mode -- we discussed
where we were when we learned of the horrible events, how we felt, who we know who was touched by it all. We checked in with loved ones throughout the
meeting and fielded kind notes from friends and colleagues.

For those of you who have written, texted, tweeted and
called with words of solidarity and support, thank you. The sensitivity and tenderness that my kids' schools have shown
is another reflection of what an amazing community we live in. We are all more bonded together by this sad experience.

The talk in the town is that next year's Boston Marathon
will be the greatest in history. Many of
my friends who have never ran before are thinking seriously about running in
it. Many vow they will be at the finish
line cheering the runners on. Many more still
vow that the fundraising efforts next year will dwarf years past. The theme throughout the city today is "we will perservere, we will thrive, this will not
slow this great community down."

April 12, 2013

I gave a talk at Harvard Law School this week to a VC and Entrepreneurship class on raising your first round of financing. It was good fun and forced me to rethink my usual presentation and add some practical elements. You can view the presentation here:

April 01, 2013

My first time jumping into the start-up world was as a freshly minted Harvard MBA in 1995. As my classmates were rushing off to high-paying, high-powered jobs on Wall Street, I joined a Series A start-up with 30 employees as a product manager, making $65,000 per year - lower than my pre-MBA salary at management consultancy The Boston Consulting Group. Since then I've had a terrific ride, but I often think of that fateful decision when I get asked, repeatedly, by other freshly minted MBAs: "How do I get a job in a start-up?" Or, more generally, "How do I even begin to find and assess start-up job opportunities - I don't even know where to start?"

The start-up universe is a large one and can seem overwhelming and impenetrable to the uninitiated. In order to narrow things down, I recommend following a simple, four-step heuristic. Here's the advice I give:

Pick a Domain. First, figure out your passion in terms of domain. Are you more of a B2C type or a B2B type? What blogs are you reading? What articles in Techcrunch or the Wall Street Journal capture your attention? What companies are your dream companies to work for? Answering these questions will help narrow down a set of domains that you are excited about. It can be more than one, but it shouldn't be more than, say, three.

Pick a City. Next, figure out where you want to live. Again, there may be multiple options, but ideally one or two favorites. Each start-up community has its own plusses and minuses, quirks and idiosyncracies. I find that once young people choose a particular start-up community, they stay there. It's a natural phenomenon - they build relationships over time that lead to one opportunity after the next. Your co-workers in one start-up become your co-founders in another. Thus, young professionals should be thoughtful about choosing a city early in their career because of this "settling in" phenomenon.

Pick a Stage. Next, determine what stage company you prefer to work in. Do you want a company that is still in the jungle phase (hacking through and trying to establish a path to success), the dirt road phase (established initial product-market fit and now trying to execute and scale in a relatively clear direction) or the highway phase (optimizing and scaling along a well-trod path)? This decision should be made somewhat based on risk appetite and somewhat on personal makeup and preferences. If you are a risk-taker and enjoy the challenges and roller-coaster ride, then the jungle phase is for you and you should bias towards seed funded or recently Series A funded companies that are pre-revenue. If you are more conservative, want a good salary and prefer to pick a "safe" winner, then a highway phase company that is pre-IPO or recently IPO'ed is the right choice.

Pick a Winner. Now that you have your target domain, geography and stage, focus on picking out a few winners - the hot companies that everyone thinks has great momentum and potential. After all, why would you want to work for anyone other than the absolute hottest company in a given category? How does an outsider figure out who the winners are in a given domain, market and stage? Ask a handful of insiders. Find the top 3 VCs, angels, tech lawyers and headhunters in your target geographical market and ask them for the two or three hottest companies that match the domain and stage you are interested in. Compile this list, pressure test it, and see what patterns you find. The firms who get the most mentions with the most compelling underlying evidence will naturally rise to the top.

Below is a sample chart that I put together answering the question for someone interested in either e-commerce, mobile or SaaS companies in SF/SV, NYC or Boston. The first company listed is an earlier stage company (either jungle or dirt road) and the second company is a later stage company (either dirt road or highway). This list is illustrative - just to make the point - not in any way attempting to be comprehensive.

Once this heuristic is complete, you now have your target list. The next step is to get warm introductions to the target. This is easier than you would think. LinkedIn is an incredibly powerful tool, as are the various alumni databases. VCs are often happy to pass along your resume and background to their portfolio companies - after all, they are doing them a favor by sending them highly qualified talent.

In general, the start-up community is so incredibly generous with its time and has such a strong "pay it forward" culture, that with tenacity and time, you can get to almost anyone. In fact, I recommended you aim high. Use this heuristic to narrow down your search and then list out the 10 people that would be your absolute top choices to sit down for 30 minutes with face to face. Then, go after those 10 people in any way you can (without stalking them or being a nudge!). These networking meetings will help you establish valuable relationships, even if the job fit isn't there.

In short, be organized, focused and tenacious. Aim high, seek out the incremental networking meetings and pick yourself out a winner. Things may not work out, but at least you're putting yourself in a position for a little positive serendipity.

March 18, 2013

In classic economics, deflation - a downward trend in prices - is a dangerous force that leads to recessions (see: Japan, economic disaster - a case study). In the world of the Internet, deflation viewed as a positive force, leading to massive consumer gains. How can we reconcile these two competing beliefs? And what impact will this deflationary pressure have on the production of high quality content?

I've been thinking a lot about deflation and its impact on the Internet economy since reading two articles in two different newspapers this last week. The first was this article in The Economist about the music business. The article contained a chart showing music industry revenues peaking in 1999 at $27 billion and dropping consistently as a result of the disruptive power of digital music and iPods/iPhones. Industry revenue may have finally flattened out at $16.5 billion, but the bigger story is that over $10 billion of value has been taken out of the music business thanks to over a dozen years of digital disruption. Artists are still producing a ton of music (I would guess music proliferation has grown during this period, although I haven't seen the data), yet the Internet has produced massive deflationary pressure.

The second article that I was struck by was in the Wall Street Journal, depicting the explosion of online video. Titled, "Web Video: Bigger and Less Profitable", the article reports on the rapid growth in online video views (39 billion in December), yet the fact that prices are dropping rapidly due to the oversupply of video inventory. The CPM (cost per thousand views) that advertisers are paying has dropped from $17-25 in 2011 to $15-20 in 2012. Advertisers and content producers are used to this trend. Whenever a new advertising medium emerges, prices are high at first, and then steadily drop as inventory swells (I wrote about this in a post that provided a bearish analysis of Groupon back in 2010). Every content business today faces this rapid drop in CPMs across every category, resulting in severe cost pressures.

So if the producers of music, video and other content are getting hammered on deflation, who is benefiting? Consumers. Consumers are getting access to music, video and other sources of content for less. They're also getting subsidized by business advertisers through social networks and search. McKinsey did a study a few years ago that sized the consumer surplus from the Internet at over 100 billion euros. Interestingly, they concluded that in measuring this surplus, consumers have benefited 85% of the gains from the Internet as compared to 15% for producers.

Thus, while the business press is full of stories of disruptive gains in business transformation, the real story of the Web is the power of the consumer and the massive gain consumers are receiving.

Although I am thrilled with the consumer surplus, I struggle with where this logical chain is eventually leading us. I worry that if there is too much deflation in content, that this consumer surplus will hit a natural limit. That natural limit will be that content producers will stop investing to produce high quality content. After all the inefficiencies have been wrung out of the system, eventually fewer producers of content will be willing to produce great content because the rewards just are no longer there. If this were to happen, consumers would be all the poorer for it.

My conclusion: although deflation has produced awesome consumer gains in the last decade, it is emerging as a real threat to content producers. But at some point, perhaps soon, it will tip to being a negative force that will cause high quality content produers to turn away and pursue other methods of financial gain. If that were to happen, we might regret allowing deflation to run rampant on the Web.

March 05, 2013

All the focus on the Pope's departure from the Vatican has got me thinking about the meaning of religion. Those ruminations have led me to a surprising conclusion: one of the reasons the force of entrepreneurship has become so powerful in recent years around the world is that entrepreneurship has evolved into a global religious movement.

Similarly, the start-up world has evolved into a set of shared beliefs and values. For example, the notion of Pay it Forward has become a core part of the entrepreneurial ethos. In religious communities, when someone is in need, the community rallies around them. People do kind things to other people just because it is the right thing to do. The start-up world has a similar share value - investors, CEOs and service providers throughout the entrepreneurial ecosystem are always willing to lend a hand, donate time and provide guidance and counsel. When I talk to entrepreneurs I've never met before, I always have a sense that we are kindred spirits on a shared journey. There is an immediate connection and mutual respect, just as I feel when I meet a member of my religion (Judaism).

The canonical texts of the entrepreneurial world are firmly established and widely read. Although they haven't sold as well as the Bible, there are a set of books that nearly every member of the entrepreneurial ecosystem has read, including: Crossing the Chasm, The Lean Start-Up and Four Steps to the Epiphany. Even those who have not studied these books and their derivative works are familiar with the concepts.

The cultural force of entrepreneurship is a powerful one. This force and the cultural norms they impose can vary from the profound (it is no longer ok to look down on the "little guy/gal" in business, young people are now listened to more carefully and given more opportunities to have an impact) to the mundane (it is now ok to wear jeans to a serious professional meeting, it is no longer ok to pull out a Blackberry in a meeting as opposed to the iPhone). The binds that tie the community together are strong. I can walk into a start-up event in Sao Paolo, Jakarta or Little Rock and have the same dialog about the same concepts - just as I can when I walk into a synagogue on Friday night anywhere in the world and feel at home.

The prophets of entrepreneurship have been firmly established. Paul Graham, Steve Blank, Eric Ries and a few others have risen to a status such that anything they say or write is followed closely by hundreds of thousands of followers. The entrepreneurial community reads all the same blogs and debates the same issues around the world. Certain corporate leaders, such as Steve Jobs (who, arguably, was practically deified in the wake of his tragic death) are also viewed with such reverence that they can command massive followings and sway opinion.

I could go on, but you get the point. I'm not sure what to do with this observation, but I think it represents a profound undercurrent that drives the start-up system in a very positive way. I'd be curious if others see it similarly.